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DEBATERS'  HANDBOOK  SERIES 


INCOME  TAX 


DEBATERS' 
HANDBOOK  SERIES 


Direct  Primaries 

Commission    Plan    of   Municipal    Govern- 
ment    (2d  ed.  rev.  and  enl.) 

Capital  Punishment 

Initiative  and  Referendum 

Election  of  United  States  Senators 

Income  Tax     (2d  ed.  rev.  and  enl.  ) 

Central  Bank  of  the  United  States 

Woman  Suffrage 

Enlargement    of  the  United   States  Navy 
(3d  ed.  rev.  and  enl.) 

Other  volumes  in  preparation. 


Each  volume,  one  dollar  net 


Debaters'  Handbook  Series 


SELECTED  ARTICLES 


ON  THE 


INCOME  TAX 

With  Special  Reference  to  Graduation 
AND  Exemption 


Second  and  Enlai^ged  Edition 

COMPILED  BY 
EDITH    M.    PHELPS 


f\r>* 


2345 


MINNEAPOLIS 
THE  H.  VV.  WILSON  COMPANY 

1911 


APR  ^  0 


HG9 

\<5 


EXPLANATORY  NOTE 


Recent  Congressional  legislation  for  an  income  tax  has 
aroused  wide-spread  interest  in  the  subject,  and  the  demand  for 
information  concerning  the  tax  has  made  necessary  a  new  edi- 
tion of  this  volume  in  a  little  over  a  year.  Nearly  all  the  ma- 
terial in  the  hrst  edition  has  been  retained,  and  the  volume  has 
been  brought  up  to  date  by  the  addition  of  new  articles  and  ref- 
erences. Two  much-discussed  features  of  the  proposed  laws 
were  the  graduation  of  the  tax  and  the  exemption  of  incomes 
under  a  given  amount, 'and  an  effort  has  been  made  to  include 
the  best  material  on  these  features  also.  The  general  plan  of 
the  former  volumes  in  this  series  has  been  followed,  and  the  book 
contains  a  bibliography,  as  well  a?  reprints  of  parts  or  all  of  the 
most  valuable  articles  on  the  subject.  Many  of  the  references 
examined  were  out  of  date  or  too  technical  for  the  purposes  of 
this  book,  and  these  have  been  omitted,  rendering  the  bibliog- 
raphy, it  is  believed,  of  more  practical  service  to  the  readers 
for  whom  it  is  intended  than  if  all  references  had  been  included. 
No  attempt  has  been  made  to  suggest  a  question  for  debate,  and 
the  magazine  articles  have  not  been  grouped  as  affirmative  or 
negative ;  instead,  an  annotation  is  given  for  each  article,  indi- 
cating its  character.  This  compilation  has  been  prepared  espe- 
cially for  the  use  of  debaters  and  others  making  a  study  of  the 
subject,  but  will  be  useful  to  anyone  desiring  information  on  this 
method  of  taxation.  Librarians  will  find  it  especially  helpful  in 
furnishing  material  they  do  not  have  already,  and  even  of  dup- 
licating articles  they  do  have,  thereby  serving  more  people  at 
the  same  time. 


CONTENTS 


Bibliography 


Bibliographies    ix 

General    References    x 

Magazine   References    xviii 

Introduction  i 

Selected  Articles 

Income   Tax New    Encyclopedia   of   Social    Reform  9 

Income  Tax   Experiences American   Economist  10 

O'Neill,    John    J.    Graduated    Income    Tax. 

American  Journal  of  Politics  1 1 

Button,  W.  T.  Income  Tax.  American  Journal  of  Politics  16 

Tyranny  of  the   Income  Tax Blackwood's   Magazine  17 

New   French    Ta.x    System. ..  .Boston    Evening   Transcript  18 
Flemming,  William  Henry.  Income  Tax — Its  Relations  to 
Political   Economy,  to  the  Constitution,  and  to  the  Su- 
preme   Court    Decision Congressional    Record  19 

Hitchcock,  Gilbert  M.  Income  Tax.  Congressional  Record  20 

Bailey,  Joseph  Weldon.  Income  Tax.  Congressional  Record  21 

Depew,   Chauncey  M.   Income  Tax.   Congressional   Record  25 

Hobson,    Richmond    Pearson.    Income    Tax 

Congressional    Record  27 

Hinshaw,  Edmund  H.  Income  Tax.  Congressional  Record  29 
Blundcn,  G.  H.   Position  and  Function  of  the  Income  Tax 

in   the    British    Fiscal    System Economic  Journal  30 

Seligman,   Edwin   R.  A.   American  Income  Tax 

Economic  Journal  35 

Cassel,   G.   Theory  of  Progressive   Taxation 

Economic  Journal  43 

Taylor,    Benjamin.    Income    Tax Fortnightly    Review  45 

Wells,  r.)avid  Ames.    Income    Tax:    Is  It   Desirable? 

Forum  5 1 

Seligman,  Edwin  R.  A.  Is  the  Income  Tax  Constitutional 


viii  ,  CONTENTS 

and  Just  ? Forum  64 

West,  Henry  Litchfield.  Shall  Incomes  Be  Taxed?  Forum  66 

Girault,  M.  L.  New  French  Income  Tax.  Harper's  Weekly  69 

Cummins,   Albert   B.   Reason   for  the  Income  Tax 

Independent  70 

West,  Max.  Income  Tax  and  the  National  Revenues 

Journal    of    Political    Economy  76 

Haskin,    Frederick  J.    Empire   of  Japan:   Japan's    Greatest 

Problem    Minneapolis   Journal  'j'7 

Williams,   M.  S.  Inheritance  and  Income  Taxes 

Moody's   Magazine  79 

Income  Tax   Here  and  in   England Nation  81 

Proposed   Income   Tax    Nation  83 

English   Income   Tax    Nation  85 

Butler,  George  A.  Shall  We   Have  an  Income-Tax? 

New  Englander  88 

Wells,  David  Ames.  Communism  of  a  Discriminating  In- 
come  Tax    North    American    Review  88 

Wilson,   William   L.   Income  Tax  on   Corporations 

North   American   Review  94 

Seligman,    Edwin    R.    A.    Relations    of    State    and    Federal 

Finance    North   American    Review  96 

Post,  Philip  S.  Income  Tax:   A  Study  of  Its  Advaritages 

and  Disadvantages  as  a  Form  of  Federal  Taxation 

Outlook  99 

Income   Tax    Outlook  109 

Seligman,   Edwin   R.  A.   Income-Tax  Amendment 

Political   Science  Quarterly  1 10 

Income  Tax    Public  Opinion  13s 

Income  Tax    Public   Opinion  136 

Taylor,    Benjamin.    Income   Tax Quarterly    Review  137 

Hughes,    Charles   E.    Special   Message   from   the   Governor  140 

Graduated   Income   Tax    Spectator  144 

Seligman,  Edwin  R.  A.  English  Budget  Proposals.  Survey  144 


BIBLIOGRAPHY 

A  star  (*)  preceding  a  reference  indicates  that  the  entire  article 
or  a  part  of  it  has  been  reprinted  in  this  volume. 

Bibliographies 

Brookings,  \V.  Du  Bois,  and  Ringwalt,  Ralph  Curtiss.     Briefs  for 

Debate,     pp.  117-20. 
Kennan,  Kossuth  Kent.     Income  Taxation:  Methods  and  Results 

in   Various    Countries.      Burdick   &   Allen,    Milwaukee,   Wis. 

1910. 

Bibliography    of    books    and    magazine    articles    consulted    and 
cited,      pp.    336-42. 

Kinsman,  Delos  Oscar.     Income  Tax  in  the  Commonwealths  of 
the  United  States.     In  American  Economic  Association,  Pub- 
lications, 3d  ser.  4:  no.  4.  '03.  p.  126. 
Seligman,  Edwin  R.  A.     Income  Tax:  A  Study  of  the  History, 
Theory    and    Practice    of    Income    Taxation    at    Home    and 
Abroad,   pp.  675-700.    The   Macmillan  Co.,   New  York.    191 1. 
This  bibliography  is  especially  rich  In  references  to  the  income- 
tax    literature    of    England,    France,    Germany    and    other    foreign 
countries. 

Seligman,   Edwin,   R.   A.     Progressive   Taxation   in   Theory   and 

Practice.    In  American  Economic  Association,  Publications.  9: 

nos.  1-2.  Ja.-Mr.  '94.  pp.  218-22. 

A  bibliography  on  the  theory  of  progressive  taxation.     The  ma- 
jority of  the  articles  are  in  foreign  languages. 

Seligman,    Edwin    R.    A.    Progressive   Taxation    in    Theory    and 
Practice.  2d  ed.  rev.  and  cnl.    In  American  Economic  Asso- 
ciation Quarterly.  3d  scr.  9:  no.  4.  D.  '08.  pp.  3-5-31- 
A  bibliography  on  the  theory  of  progressive  taxation.     The  ma- 
jority of  the  articles  are  in  foreign  languages. 

United  States.  Library  of  Congress— Division  of  Bibliography. 
Select  List  of  Works  Relating  to  Taxation  of  Inheritances 
and  of  Incomes.  20c.  Supt.  of  doc. 


X  BIBLIOGRAPHY 

Washington  (state).  Select  List  of  Works  Relating  to  the  Income 
Tax.  Comp.  by  Josephine  Holgate,  Reference  Assistant,  State 
Library,  Olympia.  1910. 
A  brief  is  also  included. 

General  References 

Books,  Painplilcis  and  Documents 

Adams,    Henry   Carter.    Science    of    Finance:     An    Investigation 

of  Public  Expenditures  and  Public  Revenues,  pp.  356-61,  476-8. 

Bastable,  Charles  Francis.  Public  Finance,  3d  ed.  pp.  271-2,  347- 

59- 

*Bliss,  William  D.  P.,  ed.  New  Encyclopedia  of  Social  Reform. 
Article  on  Income  Tax. 

Bullock,  Charles  Jesse.  General  Property  Tax  in  Switzerland. 
In  State  and  Local  Taxation,  Fourth  International  Confer- 
ence under  the  Auspices  of  the  International  Tax  Association. 
Addresses  and  Proceedings,  pp.  53-84.  International  Tax  As- 
sociation, Columbus.    1911. 

Bullock,  Charles  Jesse.  Selected  Readings  in  Public  Finance,  pp. 
254-306. 

Buxton,  Sydney.    Finance  and  Politics  ;  an  Historical  Study. 
See  Index  to  Vol.  I.  p.  360;  to  Vol.  II.  p.  391. 

Buxton,   Sydney.    Handbook  to   Political  Questions  of  the   Day 

and   Arguments   on    Either   Side,    with    an    Introduction.     7th 

ed.    pp.  245-53.    nth  ed.    pp.  302-13. 

Contains  a  svimmary  of  the  main  arguments  for  and  against  the 
graduation  of  the  income  tax.     Will  be  helpful  in  making  a  brief. 

Choate,  Joseph  H. ;  Guthrie,  Wm.  D. ;  Morawetz,  Victor ;  Fox. 
Austen  J. ;  and  Milburn,  John  G.  Memorandum  Submitted 
to  the  Legislature  of  the  State  of  New  York  in  Opposition  to 
the  Proposed  Sixteenth  Article  of  Amendment  to  the  Consti- 
tution of  the  United  States.  Separate  Concurring  Memo- 
randum, by  Francis  Lynde  Stetson.    New  York  City.    1910. 

Can   be   secured   on   application    to   Joseph   H.    Choate,    60   Wall 
St.,  New  York  City. 

Clarke,  Albert.     Proposed  Federal  Income  Tax.     Why  the  Con- 
stitution Should  Not  be  Changed,    up.    Home  Market  Club. 
Boston.  1910. 
Can  be  obtained  on  application  to  the  Home  Market  Club. 


BIBLIOGRAPHY  xi 

Congressional  Record.  44:  1763-6.    My.  5,  '09.    Income  Tax.   Wil- 
liam E.  Borah. 
In  favor  of  an   income   tax. 

*Congressional    Record.    44:    2209.     My.    18,    '09.     Income    Tax. 
Chauncey  M.  Depew. 

Objects  to  the  tax  because  (1)  it  is  an  attack  upon  the  protec- 
tive system;  (2)  if  levied  as  a  direct  tax,  it  would  be  unequal;  (3) 
it  should  be  reserved  to  the  states  and  not  to  the  federal  govern- 
ment. 

Congressional  Record.  44:  2243-59.   My.  19,  '09.   Proposed  Income 

Tax.    George   Sutherland. 

This  is  mainly  a  discussion  of  the  question  whether  the  income 
tax  is  valid  under  the  constitution. 

Congressional    Record.    44 :    2505-7.     My.    2"/,    '09.     Income-Tax 

Amendment. 

Contains  the  text  of  Senator  Bailey's  income-tax  amendment  to 
the  tariff  bill. 

Congressional    Record.    44:    2518-9.     My.   27,   '09.     Income    Tax. 

Francis  Griffith  Newlands. 

The  income  tax  is  needed  to  provide  revenue  for  the  comple- 
tion of  the  constructive  work  which  the  government  has  under- 
taken. 

Congressional    Record.     44:    4150-2.    Jl.    3,    '09.     Income    Taxes 

Abroad. 

Reprinted  from  the  United  States  Consular  and  Trade  Reports, 
no.    345.   pp.    209-16.   June,    1909.- 

Congressional  Record.   44:  4285.    Jl.  7,  '09.    Income  Tax.    Albert 

B.  Cummins. 

Answers   some   ob.iections   to   a   general   income    tax. 
Congressional    Record.    44:   4346-8.    Jl.    7,    '09.     Bailey    Income- 

Tax  Amendment  to  the  Tariff  Bill. 

The  text  is  given  of  the  substitute  for  section  6  of  the  tariff  bill. 
*Congressional    Record.    44:    4524-5.    Jl.    12,    '09.     Income    Tax. 

Richmond  Pearson  Hobson. 

Says  direct  taxation  should  be  substituted  for  indirect  taxation 
In  the  United  States. 

Congressional  Record.  44:  4526-8.   Jl.    12,  '09.    Income  Tax.    Lin- 
coln Dixon. 

His  main  argument  is  that  wealth  should  bear  Its  share  of  the 
public  burden  of  taxation. 

Congressional  Record.   44:  4547-8.   Jl.  13,  '09.    Income  Tax.    Mar- 
tin Dies. 

Wr-lcomes  the  Income  tax  as  a  step  In  the  direction  of  equality 
of  taxation. 


xii  BIBLIOGRAPHY 

Cohn,  Gustav.    Science  of  Finance,    pp.  485-520. 

Congressional  Globe.    41st  Congress,  3d  Session,    pp.  720-3.    Ja. 

25,  '71.    Income  Tax.    John  Scott. 

Declares  the  tax  unjust,  unequal,  and  unconstitutional. 

Congressional  Globe.   41st  Congress,  3d  Session,   pp.  appendix  58- 

64.  Income  Tax.  John  Sherman.    Delivered  January  25,  1871. 

In  favor  of  the  income  tax. 
Congressional  Record.  26:  3557-68.  Ap.  9,  '94.    Tariff  Bill  and  the 

Income  Tax.    David  B.  Hill. 

Protests  against  the  imposition  of  an  income  tax. 

Congressional  Record.    26 :    appendix. 

Contains  speeches  for  and  against  the  income-tax  bill   of  1894. 

Congressional  Record.    31  :    appendix. 

Contains  speeches  on  the  subject  of  an  income  tax. 
^Congressional   Record.    31 :    appendix   381-5.    Income-Tax — Its 

Relations  to  Political  Economy,  to  the  Constitution,  and  to 

the     Supreme     Court     Decision.     William     Henry     Fleming. 

Delivered  April  29,  1898. 

In   favor   of  an   income   tax. 

*Congressional  Record.    43 :  2842-3.  F.  20,  '09.    Income  Tax.  Gil- 
bert M.  Hitchcock. 
In  favor  of  an   income   tax. 

Congressional   Record.    44:   502-6.   Mr.  31,   '09.    Taxation  of   In- 
comes.   Cordell  Hull. 
In   favor   of   an   income   tax. 

Congressional  Record.   44:  1351-3.  Ap.  15,  '09.    Proposed  Income 
Tax.   Joseph  Weldon  Bailey. 

The    text    is    given    of    Senator    Bailey's    proposed    income-tax 
amendment   to   the   tariff   bill. 

Congressional  Record.   44 :  1468-9.  Ap.  21,  '09.    Proposed  Income 

Tax. 

Contains  the  text  of  Senator  Cummins's  proposed  income-tax 
amendment   to   the   tariff   bill. 

♦Congressional  Record.    44:  1692-1704.    My.  3,  '09.    Income  Tax 

Joseph  Weldon  Bailey. 

The  latter  part  of  his  speech  is  concerned  with  the  constitution- 
ality of  an  income  tax  in  the  United   States. 

Congressional  Record.  44 :  1749-50.  My.  4,  '09.  Income  Tax.  Jo- 
seph Weldon  Bailey. 

All  taxes  should  be  laid  upon  property  and  not  upon  consump- 
tion. 


BIBLIOGRAPHY  xiii 

Congressional  Record.   44:  4565-6.   Jl.  15,  '09.   Income  Tax:    Con- 
stitutional Amendment.    William  G.   Sharp. 

The  graduated  income  tax  places  the  heaviest  burden  of  taxa- 
tion on  those  best  able  to  bear  it. 

Congressional  Record.    44:  4595-6.   Jl.  15,  '09.    Income  Tax. 

In  favor  of  an  income  tax. 
Congressional    Record.    44:    4672-3.    Jl.    19,    '09.     Constitutional 

Amendment — Income  Tax.    Courtney  W.  Hamlin. 

An  income  tax  would  be  the  most  equitable  form  of  taxation 
that  could  be  devised. 

Congressional  Record.  44 :  4673-6.   Jl.  19,  '09.   Income  Tax — Con- 
stitutional Amendment.    William   E.  Cox. 

Prefers  a  graduated  income  tax  to  the  proposed  tax  on  corpora- 
tions. 

Congressional  Record.   44:  4683-5.   Jl.  19,  '09.    Income  Tax.    Cy- 
rus Cline. 
In  favor  of  an  income  tax. 

*Congressional  Record.    44:  4685.    Jl.  19,  '09.    Income  Tax.    Ed- 
mund H.  Hinshaw. 
An  income-tax  law  would  prove  a  salutary  measure. 

Congressional    Record.     44:    4951-2.     Jl.    31,    'eg.     Income    Tax. 

Frederick  Huntington  Gillett. 

The  income  tax  menaces  the  protective  system  and  gives  the 
demagogue  opportunity  to  appeal  to  class  feeling.  There  is  danger, 
too,   of  an   unjust  levy. 

Congressional  "Record.  44 :  4963-7.   Ag.  2,  '09.   Income  Tax — Con- 
stitutional Amendment.    Adolph  J.   Sabath. 

Quotes  from  a  speech  on  the  income  tax  delivered  by  William 
J.  Bryan  in  the  House  of  Representatives,  January  30,  1894. 
Congressional  Record.   45:  2539-40.    Mr.  i,  '10.   Letter  from  Sen- 
ator Elihu  Root  to  Hon.  Frederick  M.  Davenport.    Dated  F. 
17,  '10. 

He  declares  that  no  danger  to  the  powers  or  instrumentalities 
of  the  states  is  to  be  apprehended  from  the  adoption  of  the  amend- 
ment.    (Also  printed  as  a  separate  pamphlet.) 
Cossa,  Luigi.    Taxation:    Its  Principles  and  Methods,    pp.  116-25. 

G.  P.  Putnam's  Sons,  New  York.  1888. 
Daniels,    Winthrop    More.    Elements   of    Public   Finance.     Chap. 

VJII. 
Dewey,  Davis  Rich.    Financial  History  of  the  United  States,    pp. 

62-5,  107.  109,  i3<j-4i,  305-6,  427,  456-8. 
Dougherty,  J.  Hampton.    Proposed  Sixteenth  Article  of  Amend- 
ment to  the  Constitution  of  the  United  States.     Memorandum 


xiv  BIBLIOGRAPHY 

Containing  a  Criticism  of  Objections  to  the  Amendment,  and 
some  Reasons  for  its  Adoption,  i/p.  Xew  York.   igio. 
Can  be  obtained  on  request. 

Dowell,    Stephen.    Acts    Relating   to   the    Income   Tax.    6th   ed. 

Contains  a  complete  summary  of  the  income  tax  laws  in  Eng- 
land, with  statutory  provisions,  "decisions  and  sections  on  crown 
law   and   procedure   affecting   the   revenue." 

Ely,  Richard  T.  Taxation  in  American  States  and  Cities.  Part 
III.  Ch.  VII.  pp.  287-311.  Thomas  Y.  Crowell  &  Co.,  New 
York.    1888. 

Excerpts  from  the  New  Zealand  Official  Year-Book,  1906.  pp. 
15-22.    Land  and  Income  Tax  Assessments. 

Ford,  Worthington  C.  Income  Tax.  In  Lalor's  Encyclopedia  of 
Political   Science,    pp.  485-90. 

Fry,  T.  Hallett.  Income  Tax  Incubus  and  the  Budget.  Horace 
Cox.   London.    1909. 

Great  Britain.  Select  Committee  on  Income  Tax.  Report :  Se- 
lect Committee  Appointed  to  Inquire  into  and  Report  upon 
the  Practicability  of  Graduating  the  Income  Tax,  and  of 
Diflferentiating,  for  the  Purpose  of  the  Tax,  between  Per- 
manent and  Precarious  Incomes.  1906. 
Valuable. 

Hadley,  Arthur  Twining.  Economics,  an  Account  of  the  Rela- 
tions between  Private  Property  and  Public  Welfare.  Direct 
Taxes,   pp.  459-75.    G.  P.  Putnam's  Sons,  New  York.    1896. 

Hill,  Joseph  Adna.    English  Income  Tax  with  Special  Reference 

to  Administration  and  Method  of   Assessment.    In  American 

•  Economic  Association,  Economic  Studies.  4 :  nos.  4-5.  pp.  247- 

408.    O.    '99- 

A  monograph  based  on  careful  investigation  of  the  published 
materials  relating  to   the   English   income  tax. 

Reprinted  in  part  in  Bullock,  Charles  J.  Selected  Readings  in 
Public  Finance,   pp.   265-75. 

Howe,  Frederic  C.  Taxation  and  Taxes  in  the  United  States 
under  the  Internal  Revenue  system,  1791-1895.  An  Historical 
Sketch  of  the  Organization,  Development,  and  Later  Modifi- 
cation of  Direct  and  Excise  Taxation  Under  the  Constitution, 
pp.  90-102,  231-6. 

Selections  are  reprinted  in  Bullock,  Charles  J.  Selected  Read- 
ings  in    Public    Finance,    pp.    281-6. 


BIBLIOGRAPHY  xv 

*Hughes,  Charles  E.  Special  Message  from  the  Governor  Sub- 
mitting to  the  Legislature  Certified  Copy  of  a  Resolution  of 
Congress.  Entitled,  "Joint  Resolution  Proposing  an  Amend- 
ment to  the  Constitution  of  the  United  States."  lop.  Albany, 
1910. 
Can  be  secured   upon  request. 

Income  Tax :    Third  Annual  Inter-Collegiate  Debate  of  the  State 

University  of  Iowa,  against  Nebraska  and  Illinois,  1909-1910. 

46p.   Address   The    H.   W.   Wilson   Co.,   Minneapolis,   Minn. 

This  volume  contains  both  affirmative  and  negative,  construc- 
tive and  rebutal  speeches  of  the  Iowa  representatives.  A  brief  and 
a  short  list  of  references  are  also  included. 

Income  Tax  Question.  I9p.  Home  Market  Club,  Boston.  1909- 
1910. 

Contents:  Argument  of  a  great  New  York  lawyer  in  the  Pollock 
case;  Compromises  of  the  U.  S.  Constitution  would  be  overthrown 
by  the  (16th)  amendment;  Opinions  of  many  British  statesmen 
against  the  tax  in  that  country.  (Can  be  secured  on  application 
to    the    Home   Market    (ilub.) 

Kennan,  Kossuth  Kent.  Comparative  Results  of  Income  Tax- 
ation in  Various  Countries.  In  State  and  Local  Taxation, 
Fourth  International  Tax  Association  Conference  under  the 
Auspices  of  the  International  Tax  Association,  Addresses 
and  Proceedings,  pp.  11 1-8.  International  Tax  Association, 
Columbus,  Ohio.    1911. 

Kennan,  Kossuth  Kent.  Income  Taxation :  Methods  and  Results 
in  Various  Countries.  Burdick  &  Allen,  Milwaukee,  Wis. 
1 910. 

Not  a  discussion  of  the  question  from  its  theoretical  standpoint 
but  a  collation  of  the  more  important  facts  regarding  methods  and 
results  of  such  taxation  in  various  countries.  Should  be  consulted 
by  all  students  of  the  subject. 

Kinsman,  Delos  Oscar.  Income  Tax  in  the  Commonwealths  of 
the  United  States.  In  American  Economic  Association,  Pub- 
lications, 3d  ser.  4:  no.  4.  '03. 

Selections  are  reprinted  in  Bullock,  Charles-  J.  Selected  Read- 
ings in  Public  Finance,  pp.  275-80. 

Lloyd,  Henry  Demare-st.  Newest  England ;  Notes  of  a  Demo- 
cratic Traveller  in  New  Zealand,  with  some  Australian  Com- 
parisons,   pp.   104-25. 

Means.  David  MacGrcgor.  Methods  of  Taxation,  pp.  138-71. 
Dodd,  Mead  &  Co.,  New  York.  '09. 


xvi  BIBLIOGRAPHY 

Message  of  the  Governor  of  New  Jersey  Transmitting  to  the 
Legislature  the  Proposed  Sixteenth  Amendment  to  the  Con- 
stitution of  the  United  States  Relative  to  the  Income  Tax. 
7p.    Trenton,  N.  J.    1910. 

The  United  States  should  possess  the  unquestioned  power  to 
tax   incomes.      (Can   be    obtained   on    request.) 

National  Liberal  Club  Political  and  Economic  Circle,  Trans- 
actions, 1909.  Part  19.  Taxation  of  Unearned  Income.  J.  A. 
Hobson. 

National  Tax  Association,  Proceedings  of  the  First  National 
Conference,  Columbus,  Ohio,  1907.  pp.  241-9.  Taxation  of 
Incomes.    Charles  Lee  Raper. 

New  Zealand  Year-Book,  1908.  pp.  669-79.  Land  and  Income 
Tax   Assessment. 

In  New  Zealand,  a  combined  land  and  income  tax  is  in  force. 
This  article  gives  the  amount  of  exemption  and  rates  of  graduation 
for  each  form  of  tax. 

Nicholson,  Joseph  Shield.    Principles  of  Political  Economy.    Vol. 

I.  pp.  214-5;  Vol.  III.  pp.  270-80,  286,  291-2,  337-8,  354-5,  396- 

402. 
Ontario.    Assessment  Commission.    Report,  1902.  pp.  18-20,  43-9. 

Income  Tax. 
Parsons,  Frank.    Story  of   New  Zealand.     (Equity   Series.)    pp. 

194-203.  777-85. 
Pearson,    Paul   ]\I.    Intercollegiate   Debates,    pp.   91-107.    Hinds, 

Noble  &  Eldredge,  New  York.   1909. 

Includes  a  short  list  of  references;  also  a  reprint  of  an  article 
by  Philip  S.  Post  in  the  Outlook  for  March  2,  1907.  This  article 
Is  also  reprinted  in  full  in  the  present  volume. 

Report  of  the  Special  Tax  Commission  of  the  State  of  New 
York.  Transmitted  to  the  Legislature  January  15,  1907.  pp. 
58-64.    Supplemental  Report  on  the  Income  Tax. 

Root,  Elihu.  Letter  of  United  States  Senator  Root  on  the  In- 
come Tax  Amendment,  written  to  Senator  Davenport.  Pre- 
sented by  Senator  Davenport  to  the  Senate  and  Read  Also 
in  the  Assembly.   8p.    Albany,  N.  Y.  1910. 

Can  be  secured  on  request.  Also  reprinted  in  the  Congressional 
Record,  45:  2539-40.    Mr.  1,  '10. 

Root,  John  William.    Studies  in   British   National  Finance,    pp. 

80-116. 

Seligman,   Edwin  R.  A.    Essays  in  Taxation. 


BIBLIOGRAPHY  xvii 

Seligman,  Edwin  R.  A.    Income  Tax:    A  Study  of  the  History, 
Theory    and    Practice    of    Income    Taxation    at    Home    and 
Abroad.  The  Macmillan  Co.,  New  York.  191 1. 
This  book  should  be  read  by  every  student  of  the  subject. 

Seligman,    Edwin    R.    A.     Progressive   Taxation   in    Theory   and 

Practice.     In   American   Economic   Association,    Publications. 

9:   nos.   1-2.  Ja.-^Ir.  '94. 

Treats  first  of  "the  history  and  actual  condition  of  progressive 
taxation;  secondly,  the  theory  of  progression  in  its  historical  and 
positive  aspects;  and  finally  the  applicability  of  progression  to  the 
conditions  as  they  exist  in  the  United  States  at  the  present  time." 

Seligman,  Edwin  R.  A.  Progressive  Taxation  in  Theory  and 
Practice.  2d  ed.  rev.  and  enl.  In  American  Economic  Asso- 
ciation Quarterly,  3d  ser.  9:  no.  4.  D.  '08. 

Seligman,  Edwin  R.  A.  Shifting  and  Incidence  of  Taxation.  2d 
ed.  pp.  307-9. 

Sherman,  Thomas  G.  Natural  Taxation :  An  Inquiry  into  the 
Practicability,  Justice  and  Effects  of  a  Scientific  and  Nat- 
ural Method  of  Taxation,    pp.  30-2,  41-5. 

Stanwood,  Edward.  American  Tariff  Controversies  in  the  Nine- 
teenth Century.   Vol.  I.  p.  2 ;  Vol.  II.  pp.  126,  324,  338. 

United  States.  53d  Congress,  2d  Session.  House  Report  276. 
Income  Tax  and  Increase  of  Tax  on  Spirits. 

In  favor  of  the  income-tax  law  of  1894.  Says  it  could  be  col- 
lected  more  cheaply   than   the   internal   revenue   tax   then  imposed. 

United  States.    54th  Congress,  1st  Session.    House  Document  11. 

Report    of    the    Commissioner   of    Internal    Revenue    for    the 

Fiscal  Year  Ended  June  30,  1895.  PP-  IQO-S. 

The  report  includes  a  statement  of  the  amount  of  income  tax 
collected  under  the  law  of  1894  before  it  was  pronounced  unconsti- 
tutional, and  of  the  cost  of  collecting  it.  A  rough  estimate  based 
on  these  figures  .shows  that  the  cost  of  collection  would  be  less  than 
for  other  internal  revenue  taxes. 

United   States.    Monthly  Consular  and  Trade   Reports,  no.  345, 

pp.  209-18.  Je.  '09.    Income  Taxes  Abroad. 

Contains  (1)  a  report  on  the  British  income  tax  law  by  Special 
Agent  Charlps  M.  Pepper;  (2)  detailed  information  respecting  the 
proposed    French    income-tax    law. 

Partially  reprinted  in  the  Congressional  Record.  44:  4150-3.  Julv 
3,  1909. 

United   States.     Monthly   Consular  Reports.   74:  814-6.   Mr.   '04. 

Incomes  and  Income  Taxes  in  Saxony.    J.  F.  Monaghan. 

A  table  l.s  given,  showing  the  classification  of  incomes  under  the 
progressive  Income-tax  law,  and  the  amounts  paid. 


xviii  BIBLIOGRAPHY 

Wells,  David  Ames.    Theory  and  Practice  of  Taxation,    pp.  169, 
30s,  363,  S14.  517-9,  522-5,  528,  533,  538,  540,  545- 


Magazine  References 

*American  Economist.  44:  86.  Ag.  20,  '09.  Income  Tax  Experi- 
ences. 

An  objection  to  the  income  tax  is  that  it  is  difficult  to  keep  the 
rate  low  enough  to  be  able  to  expand  it  in  case  of  sudden  need  of 
more  revenue.  It  ought  to  be  reserved  for  great  national  emer- 
gencies. 

American  Economist.   44:  121.    S.  10,  '09.    Worst  and  Most  Un- 
popular. 
Illustrates  the  unfairness  of  the  tax  in  operation. 

*American  Journal  of  Politics.  3 :  650-4.  D.  '93.  Graduated  In- 
come Tax.   John  J.  O'Neill. 

Answers  two  objections:  1.  That  the  tax  is  impracticable; 
2.  That  it  involves  prying  into  personal  affairs. 

*American  Journal  of  Politics.  4:  496-504.  My.  '94.  Income  Tax. 

W.  T.  Button. 

Gives  objections  to  the  $4,000  exemption  feature  of  the  income- 
tax  bill  of  1894. 

American  Law  Review.  29:  550-8.  Jl.-Ag.  '95.  Income  Tax  De- 
cision and  the  Power  of  the  Supreme  Court  to  Nullify  Acts 
of  Congress.    Sylvester  Pennoyer. 

Denies  the  constitutional  right  of  the  Supreme  Court  to  in- 
terfere with  Congress  in  the  exercise  of  any  of  the  prerogatives  con- 
ferred upon  it  by  the  Constitution. 

Annals  of  the  American  Academy.    4:  557-89.    Ja.  '94.    Federal 

Revenues  and  the  Income  Tax.    Frederic  C.  Howe. 

Reviews  the  history  of  the  tax  in  the  United  States. 

Quoted   from   in  Public   Opinion.      16:    476-7.    February   15,   1894. 

Annals  of  the  American  Academy.  6:  268-83.  S.  '95.  Income 
Tax  Decisions  as  an  Object  Lesson  in  Constitutional  Con- 
struction.   Christopher  G.  Tiedeman. 

The  real  explanation  of  the  decision  of  '95  was  the  profound 
disbelief  of  the  majority  in  the  economic  merits  of  the  income  tax 
law. 

Annals  of  the  American  Academy.  30:  sup.  82-106.  S.  '07.  In- 
comes in   Relation   to  Taxation.     Charles   Herbert   Swan. 

Says  the  establishment  and  maintenance  of  an  income  tax  is 
inconsistent  with  the  principles  of  freedom  and  justice. 


BIBLIOGRAPHY  xix 

Arena.   35 :    213.    F.    06.    Progressive    Income    Tax   in    Victoria, 
Australia. 

The  amount  of  exemption  is  given,  also  the  rates  at  which  the 
different  amounts  of  income  are  taxed. 

Arena.    36:  659.    D.    06.    England's  Revenue  from  Her  Income- 

Tax. 

Advocates  an  income  tax  as  a  means  of  compelling  the  rich  to 
bear  their  share  of  the  burdens  of  government. 

*Blackwood's  Magazine.   178:  279-84.    Ag.   '05.    Tyranny  of  the 

Income  Tax. 

Declares  the  income  tax  to  be  the  "most  dishonourable  and  hu- 
miliating tax  that  has  ever  been  put  upon  a  vpilling  and  generous 
nation." 

*Boston    Evening   Transcript.     Mr.    10,    '09.     New    French    Tax 
System. 
Contains  a  description  of  the  new  income-tax  law. 

Chambers's  Journal.    84 :  321-5.    Ap.  20,  '07.    Anomalies  of  In- 
come-Tax Collection. 

Illustrates  the  manner  in  which  the  English  income-tax  law  is 
evaded  in  some  instances,  and  the  tax-payer  overcharged  in  others. 

Chautauquan.  54:  324-6.  My.  '09.  Income  Tax. 

The  Chamber  of  Deputies  in  France  has  recently  passed  a  grad- 
uated income-tax  law  providing  for  a  supplemental  tax  on  large  in- 
comes, and  numerous  exemptions. 

Columbia    Law    Review.     10:    379-415.     My.    '10.     Income    Tax 

Amendment.    Dwight  W.  Morrow. 

In  his  opinion  the  present  amendment  is  vague  and  ambiguous. 
Contemporary   Review.    93 :    191-206.    F.   '08.    Limits   of   Direct 

Taxation.    Hilaire  Belloc. 

Direct  taxation  is  in  appearance  the  most  just,  the  most  im- 
mediate and  the  most  simple.  Yet  it  fails  after  a  certain  point  to 
fulfill  its  apparent  function. 

Current   Literature.   47:    129-33.   Ag.   '09.   Income   Tax   and   the 

Constitution. 

Contains  arguments  for  and  against  the  new  corporation  tax  as 
opposed  to  a  general  income  tax. 

♦Economic  Journal.  2 :  637-52.  D.  '92.  Position  and  Function  of 

the  Income  Tax  in  the  British  Fiscal  System.   G.  H.  Blunden 

Reviews  the  chief  reasons  for  and  against  the  retention  of  the 
tax. 
♦Economic   Journal.   4:   639-67.    D.   '94.   American    Income   Tax. 

Edwin  R.  A.  Scligman. 

A  discussion  of  tlie  Income-tax  law  of  1894. 

This  article  appears  in  a  slightlv  different  form  in  the  Political 
Science  Quarterly.  9:  610-48.  December,  1894,  under  the  title,  In- 
come  Tax. 


XX  BIBLIOGRAPHY 

Economic  Journal.  8:  173-82.    Je.  '98.    Reform  of  Direct  Taxa- 
tion in  Austria.    R.  Sieghart. 
Australia  has  a  graduated  Income  tax. 

Economic  Journal.    8 :  325-32.    S.   '98.    Progressive  Taxation  in 
Holland.   A.  J.  Cohen  Stuart. 

Shows  that  the  principle  of  progression,  as  applied  by  the  com- 
munes, has  led  in  some  instances  to  disastrous  results. 

*Economic  Journal.    11:   481-91.   D.   '01.   Theory  of    Progressive 

Taxation.    G.  Cassel. 

Tries  to  get  at  a  fair  method  of  graduating  the  tax. 
Economic  Journal.   17:  417-22.   S.   '07.   Income-Tax  in   Holland. 

N.  G.  Pierson. 

Describes  the  system  of  income  tax  used  in  Holland. 

Economic  Review.   15:  219-23.  Ap.  '05.  Graduated  Income  Tax. 
J.  E.  Allen. 
Proposes  a  plan  for  graduating  the  English  income  tax. 

Economic  Review.    19:  410-22.    O.  '09.    Economic  Aspects  of  In- 
come Tax  Change.   J.  C.  Stamp. 

Says  the  English  tax  should  be  simplified.  At  present  it  is  too 
cumbersome  and  difficult  to  understand. 

Edinburgh  Review.  57 :  143-68.    Ap.  '23-    Proposed  Tax  on  Prop- 
erty and  Income. 

An  income  tax  is  the  fairest  of  all  taxes,  but  the  practical  diffi- 
culties in  the  way  of  its  imposition  axe  not  of  a  sort  that  can  be 
overcome. 

Fortnightly  Review.    75:  791-8.  Ap.  '01.    Mr.  Gladstone  as  Chan- 
cellor of  the  Exchequer.    Sydney  Buxton. 
History  of  the  income  tax  in  England  and  Gladstone's  efforts  to 

abolish   it. 

*Fortnightly  Review.  87:  807-17.  My.  '07.  Income  Tax.  Benjamin 
Taylor. 

A  description  of  the  graduated  income  tax  systems  applied  in 
England,    Prussia,    Saxony,    Duchy   of   Baden,    and    Holland. 

*Forum.     17:    1-13.    Mr.     '94.    Income    Tax:    Is    it    Desirable? 

David  Ames  Wells. 

An  argument  against  the  income  tax.  "The  exemption  is  ...  a 
manifestation  of  tyrannical  power,  under  whatever  form  of  govern- 
ment  it   may   be   enforced." 

This  article  is  quoted  from  in  Public  Opinion.  16:  543-4.  March 
8,  1894. 

Forum.   17:    14-8.   Mr.  '94.  Income  Tax:   Reasons  in  its  Favor. 

Uriel  S.  Hall. 

Is  in  favor  of  the  income  tax. 

This  article  is  quoted  from  in  Public  Opinion.  16:  544.  March  8, 
1894. 


BIBLIOGRAPHY  xxi 

Forum.    i8:   537-42.    Ja.   '95.    Is  the  Existing  Income  Tax  Un- 
constitutional?   David  Ames  Wells. 

The  income  tax  is  a  direct  tax,  and  is  therefore  unconstitu- 
tional. 

♦Forum.   19:  48-56.   Mr.  '95.   Is  the   Income  Tax  Constitutional 

and  Just?    Edwin  R.   A.   Seligman. 

Discusses  the  law  of  1894  and  says  It  is  calculated  to  secure 
justice. 

Forum.  19:  513-20.  Jl.  '95.  Salutary  Results  of  the  Income-Tax  De- 
cision.   George  F.  Edmunds. 
The  writer  upholds  the  decision  of  the  Supreme  Court  declaring 

the   income    tax   unconstitutional. 

Forum.     19:   521-31.    Jl.   '95.    Political   Dangers   of   the   Income 
Tax  Decision.    Edward  B.  Whitney. 

"Contends  that  past  decisions  of  the  Supreme  Court  had  estab- 
lished the  constitutionality  of  the  income  tax.  Discusses  possible 
evil  consequences  of  conceding  the  right  of  the  Supreme  Court  to 
review  the  decisions  of  earlier  courts." 

Forum.     19:    707-22.     Ag.    '95.    Is    an    Income-Tax    Socialistic? 
W.  H.  Mallock. 

Discusses  the  characteristics  of  the  tax  dependent,  first,  on  the 
amount  of  the  tax  and  its  result  on  the  classes  from  which  it  is 
taken,  and,  second,  on  the  use  of  the  fund  to  which  the  proceeds  of 
the  tax  are  applied,  and  its  effect  on  the  classes  for  whom  it  is 
expended. 

*Forum.    41:  513-20.    Je.  '09.    Shall  Incomes  Be  Taxed?    Henry 

Litchfield  West. 

The  point  emphasized  in  this  article  is  that  the  Supreme  Court 
decision,  standing,  as  it  does,  in  direct  opposition  to  the  decisions 
of  a  hundred  years  will  not  be  accepted  as  final. 

♦Harper's  Weekly.    52 :  32.   Je.  6,  '08.    New  French  Income  Tax 
M.  L.  Girault. 

The  imposition  of  a  progressive  income-tax  law  in  France  will 
result  in  the  capitalists  investing  their  money  abroad  and  this 
will  increase  rather  than  decrease  the  burdens  of  the  poor. 

Harvard  Law  Review.    20:  280-96.    F.  '07.    Income  Tax  and  the 
Constitution.    Edward   B.   Whitney. 

A  discussion  of  the  meaning  of  direct  taxes  as  stated  in  the 
Constitution. 

Independent.    62 :   352-3.    F.   14,  '07.    Income  Tax  in   France. 
Discusses  the   proposed   French   income-tax   law. 

Independent.    62:    1516-9.    Je.   27,   '07.     Income   Tax   in    France. 
Jules  Siegfried. 
Discusses  the  advisability  of  a  graduated  Income  tax  in  France. 


xxii  BIBLIOGRAPHY 

Independent.   67 :  1-2.   Jl.    i,  '09.   Tax  on  Corporation  Net  Earn- 
ings. 

Contains  a   summary  of  the   Aldrich  amendment   to   the   tariff 
bill. 

*Independent.  67:  178-82.  JI.  22,  '09.   Reason  for  the  Income  Tax. 

Albert  B.  Cvmimins. 

Favors  a  general  income  tax  to  be  paid  by  all  persons  or  cor- 
porations whose  net  annual  earnings   are   $5,000  and  over. 

Independent.    67:  1497-1501.    D.  30,  '09.    Amending  the  Constitu- 
tion.   James  Albert  Woodburn. 

Discusses  the  chances  of  ratifying  of  the  proposed  amendment 
by  the  necessary  number  of  states. 

Independent.    68:  969-71.    My.  5,  '10.    Income  Tax  Amendment. 

Frederick  M.   Davenport. 

"The  amendment  is  financially  and  economically  innocuous  and 
desirable." 

Journal  of  Accountancy.  ID:  2-7.  My.  '10.  Insert  No  Ambiguity 
into  the  Constitution.    Austen  G.  Fox. 
Not  in  favor  of  the  amendment. 

Journal  of  Accountancy.    10:  8-12.   My.  '10.   Income  Tax  Amend- 
ment Should  be  Ratified.    Lawson  Purdy. 
In   his   opinion   the   amendment   should   pass. 

Journal  of  Accountancy.  10:  13-25.  My.  '10.  No  Taxation  with- 
out  Representation.    William    D.   Guthrie. 
Not  in  favor  of  the  amendment. 

Journal  of  x\ccountancy.   10:  26-42.    j\Iy.  '10.    Income  Tax  Sound 
in  Law  and  Economics.   William  E.  Borah. 
Upholds    the    proposed    amendment. 

Journal  of  Political  Economy.    3 :  255-88.    Je.  '85.    National  Fi- 
nance and  the  Income  Tax.    A.  C.  Miller. 

Indirect    taxes   are   necessary    but   the   income   tax    is    the    best 
method  of  direct  taxation  to  use  when  additional  revenue  is  needed. 

Journal    of    Political    Economy.    3:    311-37.    Je.    '85.    Legislative 

History    of    the    Second    Income-Tax    Law.     George    Tunell. 

"With  outline  of  discussions  and  arguments  employed.     Names 
certain   'imperfections  and  crudities   in  the  new  act.'  " 

Journal  of  Political  Economy.  4 :  37-53.   D.  '95.   Income  Taxation 
in  France.    H.   Parker  Willis. 

A   brief   account   of   the   income   tax   projects   from   1848    to   the 
date  of  the  article. 


BIBLIOGRAPHY  xxiii 


*Journal  of  Political  Economy.    8:  433-51.    S.  '00.    Income  Tax 
and  the  National  Revenues.   Max  West. 

"Discusses  the  meaning  of  direct  taxation,  ideas  of  the  makers 
of  the  Constitution,  examines  the  decisions  of  the  Supreme  Court 
in  the  Hylton  and  Springer  cases  as  to  their  inconsistency  with  the 
decision  upon  the  income  tax  in  1894,  thinks  an  income  tax  by  the 
federal  government  only  attainable  by  an  amendment  to  the  Consti- 
tution."— Lib.  of  Congress. 

Journal  of  Political  Economy.    18:  610-27.    O.  '10.    Income  Tax 

in  Georgia.    William  A.  Shelton. 

"An  attempt  to  bring  together  the  essentials  of  all  extant  in- 
formation in  regard  to  this  subject." — Author. 

Journal  of  the  Statistical   Society.    37 :    155-74-  Je.    '74-  Recon- 
struction of  the  Income  and   Property  Tax.    Leone  Levi. 

Says  the  income  tax  should  be  maintained  and  the  amount  of 
taxation  increased. 

♦Minneapolis    Journal.     O.    6,    '09.     Empire    of    Japan :     Japan's 

Greatest  Problem.    Frederick  J.  Haskin. 

Jaj)an  has  a  progressive  income  tax  which  is  levied  at  an  ex- 
ceedingly high  rate. 

♦Moody's    Magazine.   3:    331-3.   F.   '07.   Inheritance   and   Income 

Taxes.  M.  S.  Williams. 

The  federal  government  does  not  need  such  taxes  and  it  cannot 
properly  or  economically  utilize  them. 

Nation.    9 :  452-3.    N.  25,  '69.    Way  the  Income  Tax  Ought  and 

Ought   Not  to  be  Collected. 

Answers  two  objections:  1.  That  it  is  oppressive.  2.  That  it 
gives   rise   to   fraud. 

Nation.   26:  162-3.    Mr.  7,  '78.    Income  Tax  and  Silver  Agitators. 
Says  that  the  income  tax  law  is  offered  not  as  a  good  way  of 
raising   revenue   but   as   a  means   of  harassing  a  certain   class   of 
people. 

♦Nation.  26:  287.    My.  2,  '78.    Income  Tax  Here  and  in  England. 

The  fact  that  the  income  tax  is  successful  as  a  means  of  raising 
revenue  in  England  is  no  argument  for  its  adoption  in  the  United 
States. 

♦Nation.    57 :  404-5.    N.  30,  '93.    Proposed  Income  Tax. 

Contains  a  brief  review  of  the  income-tax  laws  of  the  Civil  War 
period. 

Nation.  58:  24-5.  Ja.   11,  '94.  Graver  Evils  of  the  Income  Tax. 
The  Income  tax  cannot  be  justified  either  on  the  lines  of  expe- 
diency or  justice.     It  is  distinctly  class  legislation. 

Nation.    58:  133-4.    F.  22,  '94.    Beauties  of  the  Income-Tax  Law. 

Criticizes  some  of  the  provisions  of  the  law  of  1894. 

Nation.  60:  217.  Mr.  21,  '95.  Income  Tax.  Francis  J.  Lippitt. 

His  conclusion  is  that  the  Income  tax  is  a  direct  tax  and  so  Is 
unconstitutional. 


xxiv  BIBLIOGRAPHY 

Nation.  60:  2~2.   Ap.  11,  '95.    Income-Tax  Decision. 

The  United  States  is  not  ready  for  an  income  tax. 

*Nation.   71 :  197.    S.  6,  '00.    English  Income  Tax. 

An  argument  in  favor  of  the  income  tax  is  that  it  constitutes 
a  checli  on  public  expenditures. 

Nation.   92:  84-5.   Ja.  26,  '11.    Income  Tax.    X.  Y.  Z. 

It  would  be  better  to  curtail  present  Congressional  extrava- 
gance than  to  increase  the  power  of  taxation. 

National  Civic  Federation  Review.   2 :  14-6.    Mr.-Ap.  '07.    Income 

and  Inheritance  Taxes  Discussed. 

Arguments  for  and  against  the  income  tax;  a  review  of  the  dis- 
cussion of  the  income  and  inheritance  taxes  which  took  place  at 
the  6th  annual  meeting  of  the  Federation. 

National    Monthly,    p.    166.     O.    '09.     Income    Tax.     Everett   P. 

Wheeler. 

A  resume  of  income-tax  legislation  in  the  United  States. 
New  Englander.    2)7 '■  543-52.    Jl.  '78.    Shall  Incomes  Be  Taxed? 

Henry  C.  Kingsley. 

Discusses  objections  to  the  income  tax  and  the  question  of  its 
constitutionality. 

*New  Englander.   54:  39-43.   Ja.  '91.    Shall  We  Have  an  Income- 
Tax?    George  A.  Butler. 

The  income  tax  is  fair  in  principle  but  in  actual  practice  it 
proves    to    be    the    most    unjust    of   all    taxes. 

Nineteenth  Century.    16 :  56-67.    Ja.  '07.    Evolution  of  the  Income 

Tax.    George  McCrae. 

In  favor  of  graduating  the  tax. 
*North  American  Review.     130 :   236-46.    Mr.  '80.    Communism 

of  a  Discriminating  Income-Tax.    David  Ames  Wells. 

Says  that  exemption  and  graduation  cannot  be  "founded  or  de- 
fended on  any  sound  principles  of  free  constitutional  government." 

*North  American  Review.    158:  1-7.   Ja.  '94.   Income  Tax  on  Cor- 
porations.   William  L.  Wilson. 

An  income  tax  on  the  earnings  of  corporations  is  proposed  to 
make  up  the  deficit  in  the  revenues. 

Reprinted  in  condensed  form  in  Public  Opinion.  16:  355-6.  Jan- 
uary 11,   1894. 

North  American  Review.   158:  150-6.  F.  '94.   Income  Tax  in  Eng- 
land.  John  Lubbock. 
Describes    the    income-tax    system    in    England. 

North  American  Review.    160:  601-6.   My.  '95.    Spirit  of  the  Tax. 
Plain-Speaker. 

An  undue  tax  on  wealth  causes  it  to  cease  to  be  productive.  In 
the  end  it   "reacts  on  labor  by  contracting  its  enterprises." 


BIBLIOGRAPHY  xxv 

North  American  Review.    182:  824-8.    Je.  '06.    Graduated  Taxa- 
tion of  Incomes  and  Inheritances.     Wayne  Mac  Veagh. 
In    favor   of   a    graduated    income    tax. 

*Xorth  American  Review.    190:615-27.   N. '09.   Relations  of  State 

and  Federal  Finance.    Edwin  R.  A.   Seligman. 

The  income  tax  is  a  desirable  adjunct  to  our  scheme  of  federal 
taxation. 

North    American    Review.     191  :    755-61.     Je.    'lo.     Income-Tax 

Amendment.   William  E.  Borah. 

The  passing  of  this  amendment  gives  no  new  taxing  power 
to  Congress,  nor  does  it  limit  the  present  powers  of  the  states. 

Outlook.   49:  312-3.   F.  17,  '94.    Income  Tax  in  England.    Edward 

Porritt. 

The  English  income  tax  is  regarded  favorably  by  the  people 
and   is   easy   to   collect. 

*Outlook.  85  :  503-8.  Mr.  2,  '07.  Income  Tax :  A  Study  of  Its 
Advantages  and  Disadvantages  as  a  Form  of  Federal  Taxa- 
tion.   Philip  S.   Post. 

Arguments  both  for  and  against  the  income  tax  are  given.  The 
author  contends  that  the  exemption  of  all  but  the  larger  incomes  is 
class  legislation  and  is  a  violation  of  elemental  rights. 

This  article  is  also  reprinted  in  full  in  Pearson,  Paul  M.  Inter- 
collegiate Debates,  pp.  91-107. 

*Outlook.  93  :  328-9.  O.  16,  '09.  Income  Tax. 

Taxation  should  be  determined  not  by  the  ability  of  the 
individual  but  by  the  service  the  state  renders  to  him.  "  Property 
should   be  taxed  rather  than  income. 

Outlook.    93 :  602-3.    N.  13,  '09.    Income  Tax. 

A  reply  to  the  income-tax  editorial  in  the  Outlook.  93:  328-9. 
October  16,  1909. 

Outlook.    94:   109-ir.    Ja.   15,  '10.    Governor  Hughes  and  the  In- 
come Tax. 
An  answer  to  Justice  Hughes's  objection  to  the  amendment. 

Outlook.  94:  215-9.  Ja.  22,  '10.  Income  Tax  Amendment.  Nor- 
ris  Brown. 

An  argument  for  the  wisdom  of  giving  power  to  Congress  to 
impose  the  tax  should   it  prove  desirable  or  necessary. 

Outlook.  94:   552-3.   Mr.   12,   '10.   Senator  Root  and  the   Income 

Tax  Amendment. 

The  proposed  amendment  will  not  grant  the  power  to  tax  state 
bonds    and    securitie.s. 

Outlook.    95:  49-50.    My.  14,  '10.    Income  Tax  Amendment  Nut 
Ratified  in  New  York  State  and  Massachusetts. 
Not  in  favor  of  an  income  tax. 


xxvi  BIBLIOGRAPHY 

Overland,  n.s.  25 :   184-7.    F-  '95-    Is  Opposition  to  the  "Income 
Tax"  Either  Logical  or  Legal?    Charles  J.  Swift. 

Answers  two  objections:  1.  That  it  is  unconstitutional.  2.  That 
it  is  inquisitorial. 

Political  Science  Quarterly.  4 :  37-65.    Mr.  '89.   Income  and  Prop- 
erty Taxes  in  Switzerland.    Gustav  Cohn. 

The  experience  of  Switzerland  would  seem  to  show  that  "every 
existing  state  is  forced  to  depend  upon  a  comprehensive  scheme  of 
indirect  taxation.     The  income  tax  can  only  supplement  at  best." 

Political  Science  Quarterly.   9 :  610-48.   D.  '94.    Income  Tax.    Ed- 
win R.  A.  Seligman. 

This  article  appears  in  slightly  different  form  in  the  Economic 
Journal.  4.:  639-67.  December,  1894,  under  the  title,  American  In- 
come Tax. 

Political  Science  Quarterly.    10:  221-47.    Je.  '95.    Income  Tax  in 

the  American  Colonies  and  States.    Edwin  R.  A.  Seligman. 

Contains  a  brief  summary  of  the  income-tax  systems  of  the  va- 
rious states. 

Political  Science  Quarterly.    13 :  442-76.    S.  '98.    Direct  and  In- 
direct Taxes  in  Economic  Literature,    Charles  J.  Bullock. 

A  classification  of  the  various  distinctions  made  by  economists 
between  direct  and  indirect  taxes. 

Political  Science  Quarterly.  16:  701-11.  D.  '01.  Taxation  in  the 

Philippines.    Carl  Copping  Plehn. 

.  The  Philippine  income  tax  avoids  almost  entirely  the  difficulties 
of  a  personal  declaration  of  income  and  the  dangers  of  misrepre- 
sentation. 

*Political    Science    Quarterly.   25:    193-219.   Je.    '10.    Income-Tax 

Amendment.     Edwin   R.   A.    Seligman. 

An  answer  to  Justice  Hughes's  contention  that  the  amendment 
would  give  the  federal  government  power  to  impair  the  credit  and 
independence    of    the   states. 

Progress.   5  :  296-7.   F.  '00.   Taxation  of  Incomes. 

Contains  a  good  condensed  statement  of  tlie  Supreme  Court  de- 
cision in  the  Pollock  case. 

Quoted  from  Daniels,  "Winthrop  More.  Elements  of  Public 
Finance,      pp.    200-2. 

Public  Opinion.  15:   169-70.  My.  20,  '93.  Income  Tax. 

Contains  arguments  both  for  and  against  the  imposition  of  an 
Income    tax. 

*Public  Opinion.    15:  193-4.    My.  27,  '93.    Income  Tax. 

Comments  of  the  press  on  the  proposed  income  tax. 
Public  Opinion.    15:  218-20.   Je.  3,  '93.    Income  Tax. 

Contains  arguments  both  for  and  against  the  income  tax. 
Public   Opinion.    15:   242-4.    Je.    10,  '93.    Income  Tax. 

Contains  arguments  both  for  and  against  the  income  tax. 


BIBLIOGRAPHY  xxvii 


*Public   Opinion.    15 :  264-6.    Je.   17,  '93.    Income  Tax. 

Press  comments  in  favor  of  and  against  the  proposed  income- 
tax  law. 

Public  Opinion.  16:  355-6.    Ja.  11,  '94.    Income  Tax  on  Corpora- 
tions.   William  L.  Wilson. 

Condensed  from  the  North  American  Review.  158:  1-7.  January, 
1894. 

Public  Opinion.    16:  476-7.   F.  15,  '94.    Federal  Revenues  and  the 

Income  Tax. 

Quoted  from  the  Annals  of  the  American  Academy.  4:  557-89. 
January,   1894. 

Public  Opinion.    16:  543-4.    Mr.  8,  '94.    For  and  Against  an  In- 
come Tax. 

Excerpts  from  articles  on  the  income  tax  by  David  Ames  Wells 
and  Uriel  S.  Hall.    Forum.   17:   1-13,  14-8.  March,  1894. 

Public  Opinion.  17:  335.  Jl.  12,  '94.  Senator  Hill's  Objections  to 

the  Income  Tax. 

A  summary  of  the  main  arguments  against  the  income-tax  law 
of  1894. 

Quarterly  Journal  of  Economics.    3:  436-61.    Jl.  '89.    Direct  Tax 

of  1861.    Charles  F.  Dunbar. 

Discusses  the  passing  and  actual  working  of  the  law. 
Quarterly  Journal    of    Economics.   6:    307-25.    Ja.    '92.    Prussian 

Income  Tax.    Joseph  Adna  Hill. 

"The  development  of  personal  taxation  in  Prussia  has  resulted 
in  the  adoption  of  a  partially  progressive  income  tax." 

Reprinted  in  part  in  Bullock,  Charles  J.  Selected  Readings  in 
Public  Finance,  pp.  254-65. 

Quarterly  Journal  of   Economics.  8:   416-52.   Jl.   '94.   Civil  War 

Income  Tax.    Joseph  Adna  Hill. 

"Takes  up  in  tUrn  the  adoption  of  an  income  tax,  difficulties  as 
to  the  rate  to  be  levied,  taxation  of  certain  classes  of  dividends, 
definition  of  'income,'  administration  of  the  income  tax,  question  of 
the  continuation  of  the  act,  the  assessment  of  the  tax,  and  the 
income  tax  as  a  war  tax." 

Quarterly   Journal    of    Economics.    20:    287-300.    F.    '06.    British 
Income  Tax  in  Recent  Years.   W.  H.  Price. 

The  recent  reports  of  the  British  commissioners  of  inland  rev- 
enue .show  that  the  tax  i.s  so  well  administered  "that  it  risi)onds 
quickly  to  changes  in  national  prosperity  but  is  not  sensitive  to  the 
rate  at  which  it  is  levied." 

Quarterly   Journal    of    Economics.    23 :    296-306.    F.    '09.    Present 

Period  of  Income  Tax  Activity  in  the  American  States.  De- 

los  Oscar  Kinsman. 

The  current  movement  in  favor  of  an  income  tax  is  due  not  "to 
the  success  of  the  tax  in  any  state,  but  rather  to  the  spirit  of  re- 
form now  sweeping  the  country." 


xxviii  BIBLIOGRAPHY 

^Quarterly  Review.  206:331-53.   Ap.  '07.   Income  Tax.  Benjamir 

Taylor. 

Does  not  favor  graduation  of  the  tax  or  exemption. 
Review  of  Reviews.    3;^ :  736-7.    Je.   '06.    Movement  in   England 

toward  a  Graduated  Income  Tax. 

Larger  exemptions  should  be  granted  to  men  supporting  fam- 
ilies. 

Review  of  Reviews.  41  :  272-3.   Mr.   '10.   Governor  Hughes  and 

the  Income  Tax. 

Discusses  the  chances  of  the  adoption  of  the  sixteenth  amend- 
ment. 

Saturday  Review.  61 :  141-2.  Ja.  30,  '86.  Graduated  Income-Tax. 

The   principle  of  graduated   taxation,   if  once   introduced,   could 
be   extended    indefinitely. 
Saturday  Review.   69:  68-9.   Ja.  18,  '90.    Income-Tax. 

The  operation  of  the  income  tax  is  clumsy  and  offensive  and 
results    in    fraud. 

Single  Tax  Review,  pp.  5-8.    My.-Je.  '08.   Demand  for  an  Income 

Tax.    John  Harrington. 

Objects  to  the  tax  because  (1)  the  exemption  feature  is  opposed 
to  the  American  idea  of  equality;  (2)  the  tax  is  inquisitorial; 
(3)  it  puts  a  premium  upon  fraud. 

Spectator.    59:  1331-2.    O.  9,  '86.    Income-Tax  in  France. 

Discusses  the  difficulties  of  imposing  an  income  tax  in  France. 

Spectator.    70:  595-6.    My.  6,  '93.    Income-Tax  Schemes. 

Graduation  and  differentiation  of  the  tax  will  destroy  its  effi- 
ciency. 

*Spectator.    95 :  246-7.    Ag.  19,  '05.    Graduated  Income-Tax. 

A  comparison  of  the  methods  of  graduation,  exemption,  and  dif- 
ferentiation   in    force    in    various    countries. 

*Survey.    23:  515-8.    Ja.  15,  '10.    English  Budget  Proposals.    Ed- 
win R.  A.  Seligman. 

The  English  income  tax  now  includes  the  features  of  exemption 
and   graduation. 

Westminster  Review.   77 :  52-69.   Ja.  '62.   Income-Tax  Reform. 

Discusses  the  need  for  differentiation  of  the  tax. 
Westminster  Review.    144:  401-8.    O.  '95.    Graduated  Taxation  in 

the  Canton  de  Vaud.  W.  B.  Duffield. 

The  idea  of  graduated  taxation  prevailed  widely  and  has  been 
carried  into  effect  in  many  of  the  self-governing  communities 
which   make   up   the   Swiss   Confederation. 

Westminster   Review.     146:   555-66.    N.   '96.    Graduated    Income 

Tax.    James   Burns. 

Discusses  the  principles  of  graduation  and  describes  schemes 
for  putting  it  into  practice. 


BIBLIOGRAPHY  xxix 

Westminster  Review.    165 :  22-30.    Ja.  '06.    Next  Budget.    W.  D. 
Macgregor. 

Property  and  possessions  should  be  the  measure  of  taxation 
rather  than  income. 

Westminster  Review.    165:  124-31.    F.  '06.    Earned  and  Unearned 

Incomes  and  the  Income  Tax.   A.  Hook. 

Discusses  differentiation  between  earned  and  unearned  incomes. 

Westminster  Review.    166:   115-7.    Ag.    06.    Income-Tax  Inquiry. 

The  income  tax  is  a  direct  tax  on  honesty  and  its  economic 
effect  is  to  discourage  trade  and  industry  and  to  cause  unemploy- 
ment. 


SELECTED  ARTICLES  ON 
THE  INCOME  TAX 

INTRODUCTION 

The  submission  by  Congress  in  1909,  to  the  various  state 
legislatures,  of  an  amendment  to  the  Constitution  of  the  United 
States,  giving  Congress  the  power  to  tax  incomes,  is  by  no 
means  an  attempt  to  make  possible  a  new  or  untried  form  of 
taxation.  The  income  tax  was  employed  in  the  United  States 
to  provide  revenue  for  the  Civil  War ;  for  many  years  it  has 
played  a  leading  part  in  the  fiscal  systems  of  England  and  Ger- 
many ;|a  bill  for  its  adoption  is  now  pending  in  France;  and  it 
is  a  more  or  less  important  element  in  the  tax  systems  of  many 
other  countries. 

The  income  tax  varies  in  theory  from  taxes  on  land,  on  the 
individual,  on  product,  or  on  expenditure,  in  that  it  conforms 
more  closely  to  the  principle  of  faculty,  or  ability  to  pay.  We 
therefore  find  the  ta.x  developing  out  of  taxes  on  property  and 
expenditure  where  there  is  a  desire  to  apportion  the  burdens  of 
government  according  to  the  ability  of  its  citizens  to  bear  such 
burdens. 

Prior  to  the  nineteenth  century,  only  two  attempts  of  any  im- 
portance were  made  to  levy  taxes  on  income.  In  Florence,  dur- 
ing the  temporary  reign  of  democratic  liberty  in  the  fifteenth 
century,  the  property  tax  was  converted  into  an  income  tax  in 
order  to  reach  the  earnings  of  the  large  merchant  princes  of  the 
times.  The  method  of  administration  was  woefully  inefficient, 
and  with  the  overthrow  of  democracy,  the  tax  passed  away. 

The  other  attempt  was  the  taille  laid  upon  the  French  people 
before  the  Revolution.  It  was  chiefly  a  land  tax  modified  some- 
what according  to  ability  to  pay.     It  was  supplemented  first  by 


2  SELECTED   ARTICLES 

the  capitation  tax,  then  by  the  dixicme  and  vingtieme  which 
were,  in  effect,  taxes  on  income.  Frauds,  abuses  and  injustice 
became  so  prevalent  that  with  the  Revolution,  the  entire  system 
was  swept  away. 

The  income  tax  made  its  first  appearance  in  England  in  1798, 
when  it  was  levied  by  Pitt  to  provide  revenue  for  the  war  against 
France.  It  was  known  as  the  "triple  assessment"  and  was  con- 
tinued in  force  with  more  or  less  important  modifications  until 
1816  when  its  enemies  succeeded  in  having  it  repealed.  A  strong 
sentiment  in  favor  of  the  tax  remained,  nevertheless,  and  in 
1842  Peel  reimposed  it  in  order  to  meet  the  deficiencies  of  the 
budget  without  resorting  to  an  increase  of  the  already  burden- 
some taxes  on  expenditure.  The  tax  was  intended  as  a  tempo- 
rary measure  only,  but  in  spite  of  the  efforts  of  Gladstone  and 
others  of  his  opinion,  to  repeal  it,  the  tax  remained,  the  rate 
varying  from  year  to  year  to  meet  the  exigencies  of  government. 

Gradually  the  feeling  grew  that  the  income  tax  was  destined 
to  remain  a  permanent  part  of  the  English  tax  system,  and, 
toward  the  close  of  the  nineteenth  century,  steps  were  taken  to 
increase  its  efficiency.  Up  to  this  time,  no  provision  had  been 
made  for  differentiating  between  earned  and  unearned  incomes, 
or  for  taxing  the  incomes  of  the  rich  at  a  higher  rate  than  those 
of  the  poor.  Both  of  these  principles  were  rapidly  coming  to  be 
recognized  as  sound  and  just  in  theory,  the  difficulty  was  to 
embody  them  in  the  present  system  in  a  manner  that  would  be 
practical.  To  solve  the  problem,  two  committees  were  appointed, 
one,  the  Departmental  Committee  of  1904,  to  consider  the  en- 
tire question  of  the  income  tax,  and  the  other,  the  Select  Com- 
mittee of  1906,  to  study  especially  the  features  of  differentiation 
and  graduation  or  progression.  Following  the  recommendations 
of  these  committees,  the  principle  of  differentiation  was  adopted 
in   1907,  and  graduation  in   1910. 

The  characteristic  feature  of  the  English  income  tax  is  the 
method  of  collection,  known  as  "stoppage-at-source."  Incomes 
are  separated  into  schedules,  and  the  tax  in  each  schedule  is  col- 
lected as  far  as  possible  from  the  individual  or  firm  paying  the 
amount  which  is  to  become  the  income  of  the  person  assessed. 
AH    incomes   below   ii6o   are   exempt   altogether   from   the   tax, 


INCOME  TAX  3 

while  abatements  are  allowed  in  slowly  diminishing  amounts  on 
incomes  under  ijoo.  All  incomes  over  this  amount  pay  the  full 
rate.  Differentiation  is  applied  only  to  incomes  above  £2000, 
earned  incomes  above  this  amount  being  taxed  at  a  slightly  lower 
rate  than  unearned  incomes.  Graduation  is  provided  for  by  a 
super-tax  on  all  incomes  over  £5000  on  the  amount  by  which  the 
income  exceeds  £3000.  A  personal  declaration  of  income  is  called 
for  in  this  part  of  the  tax  only,  and  adequate  provision  is  made 
for  the  assessing  of  the  tax  on  such  persons  by  the  Special  Com- 
missioners in  case  no  return  is  made  voluntarily. 

The  determined  opposition  of  former  years  has  gradually 
given  way  to  a  recognition  of  the  usefulness  of  the  income  tax  as 
a  means  of  revenue.  The  change  in  the  public  attitude  toward 
the  whole  question  of  taxation  is  partly  responsible  for  the  in- 
creasing favor  with  which  the  tax  is  regarded,  but  it  is  even  more 
due  to  the  improvements  in  the  principle  of  the  tax  and  the  meth- 
ods of  administration.  The  "stoppage-at-source"  method  of  collec- 
tion has  resulted  in  a  comparatively  small  amount  of  fraud  and 
evasion,  with  little  annoyance  to  the  taxpayer  from  inquisitorial 
procedure  on  the  part  of  the  tax  officials.  While  fraud  and  in- 
justice have  by  no  means  disappeared,  the  tax  may  be  considered 
a  success. 

The  administration  of  the  income  tax  in  Germany,  especially 
in  Prussia,  is  in  striking  contrast  to  the  English  system.  Here, 
a  compulsory  declaration  of  income  is  required  from  every  one 
whose  annual  income  is  over  3000  marks.  Incomes  under  this 
amount  are  asses.sed  by  the  local  officials.  With  compulsory 
declaration  is  coupled  the  most  extreme  and  arbitrary  power  on 
the  part  of  the  tax  ofificials,  to  question  the  tax-payer  and  even  to 
compel  him  to  show  his  books  and  papers. 

Prussia  was  the  first  of  the  German  states  to  take  steps  toward 
an  income  tax,  the  first  move  being  the  adoption  of  a  class  tax 
in  1820.  This  was  followed  in  1851  by  a  class  and  classified- 
income  tax.  which  provided  for  a  class  tax  on  incomes  under  1000 
thalers.  supplemented  by  a  classified  tax  on  incomes  of  1000 
thalers  and  over,  the  highest  income  taxable  being  240.000  thalers. 
It  was  assessed  by  officials  but  any  inquiry  into  the  financial  con- 
ditions   of    the    tax-payer    was    forbidden.      The    administrative 


4  SELECTED   ARTICLES     . 

short-comings  of  the  tax  and  the  exemption  of  the  wealthy 
citizens  made  it  increasingly  unpopular,  and  in  1891,  the  law  was 
thoroughly  revised.  With  a  few  important  modifications,  this 
law  is  still  in  force. 

The  law  of  1891  abolished  the  class  tax  altogether,  substitut- 
ing for  it  a  general  income  tax.  All  incomes  under  900  marks 
are  exempt,  entirely,  and  incomes  above  this  amount  are  sepa- 
rated into  seventy-five  grades,  with  a  fixed  tax  in  each.  Abate- 
ments are  extensive  and  differentiation  is  made  between  earned 
and  unearned  incomes. 

The  income  tax  is  now  a  feature  of  the  system  of  taxation  in 
all  the  twenty-five  states  of  Germany,  except  Bavaria  and  the 
two  Mecklenburgs.  The  scheme  is  evervwhere  similar,  and  the 
tax  has  become  an  effective  fiscal  measure.  The  opposition  of 
the  people  has  been  practically  overcome,  and,  in  spite  of  in- 
quisitorial methods  of  collection,  the  administration  is  very 
efficient.  It  is  doubtful,  however,  if  such  stringent  methods  could 
be  employed  in  a  more  democratic  country. 

In  Italy,  the  income  tax  has  been  less  successful.     The  Eng- 
lish method  of  taxing  incomes  at  the  sourte  has  been  incorporated 
into  the  Italian  system,  but  the  rates  are  exceedingly  high,  and 
public   conscience  has   given   way   under  the   strain.      In   Austria 
the  tax  is  far  from  being  a  success.     The  yield  is  small  and  the 
administration    is    inefficient.      The    chief    source    of    revenue   in 
Switzerland   is   the   general   property  tax   supplemented   in   some 
of  the  cantons  by  an  income  tax.     Bern,  alone,  has  a  general  in- 
come tax.     The  tax  is  generally  considered  to  have  failed  as  a 
cantonal  measure.     Japan   levies   a  progressive   income   tax   at   a 
high  rate,  reaching  as  high  as  68%  on  the  largest  incomes.     Hol- 
land  and   New   Zealand   have   passed   laws   for   an   income  tax, 
providing  for   both   graduation  and  exemption.     In   Holland  the 
tax  is  laid  on  the  net  income  only.    Hungary,  Denmark,  Australia 
and    the    states    of    Massachusetts,    Virginia.    North    and    South 
Carolina,  and  Oklahoma  also  levy  taxes  on  incomes.     As  a  rule, 
these  state  tax  laws  are  not  rigidly  enforced  and  the  yield  is  in- 
significant. 
/- — -The  income  tax  idea  is  extending  gradually  to  other  countries, 
the  two  latest  movements  of  importance  developing  in  the  United 


INCOME  TAX  5 

States  and  France.  Following  the  Revolution,  a  system  of  direct 
taxation  was  instituted  in  France  which  still  exists.  It  was  re- 
markably successful  at  first,  but  the  growth  of  large  fortunes 
resulted  in  the  development  of  inequalities  and  the  system  is 
fairly  outgrown.  The  income  tax  was  suggested  as  a  remedy  as 
early  as  1848,  and  from  that  time  agitation  in  favor  of  this  method 
of  taxation  has  been  increasingly  persistent.  After  several  fail- 
ures, a  bill  proposing  a  tax  on  incomes  v.as  introduced  in  1907,  by 
Caillaux,  ]\Iinister  of  Finance.  It  passed  the  Chamber  of  Dep- 
uties, in  March  1909  but  was  reported  unfavorably  by  the  Senate, 
in  1910.  Unless  the  opposition  increases  in  strength  very  ma- 
terially during  the  next  few  years,  it  is  probable  that  the  bill 
will  eventually  become  law. 

Caillaux's  income  tax  scheme  is  a  combination  of  the  Eng- 
lish and  German  systems,  adapted  to  French  conditions.  Incomes 
are  to  be  arranged  in  schedules  and  the  tax  collected  as  far  as 
possible  at  the  source,  but  the  principle  of  differentiation  has 
been  carried  farther  than  in  England,  and,  because  of  the  lower 
standard  of  living,  the  amount  of  exemption  and  the  system  of 
abatements  begin  with  a  lower  rate  of  income.  From  the  Ger- 
man system  Caillaux  has  adopted  the  idea  of  taxing  the  entire  in- 
come but  applied  it  only  to  the  higher  incomes.  As  far  as  pos- 
sible, he  has  avoided  the  German  method  of  self-declaration, 
also  the  arbitrary  methods  of  collection  which  the  Frenchman 
wouj^d  not  endure. 
sAs  early  as  181 5  an  income  tax  was  proposed  in  the  United 
States  to  provide  revenue  for  the  War  of  1812.  The  early  .  / 
declaration  of  peace  stopped  active  procedure  for  the  time  being, 
but  the  tax  had  its  friends  and  it  was  finally  imposed  as  a  part 
of  the  tax  code  of  1862  which  was  designed  to  provide  revenue 
for  the  Civil  War.  The  tax  continued  in  force  with  various 
changes  until  1872  when  it  expired  by  limitation.  During  the 
War,  it  was  successful  in  bringing  in  large  sums  for  revenue, 
but  in  later  years  it  became  increasingly  unpopular  and  less  ef- 
fective. The  chief  reason  for  its  disappearance,  however,  was 
that  it  was  no  longer  needed. 

During  the  ten  or  more  years  of  prosperity  following  the  ex- 
piration of  the  tax,  it  was  practically  forgotten,  but  the  Demo- 


6  SELECTED  ARTICLES 

cratic  victory  of  1892  coupled  with  an  increasing  dislike  of  the 
tariff  and  the  necessity  for  fiscal  reform,  led  to  its  readoption. 
In  1894  a  law  was  passed  providing  for  a  tax  of  2%  on  all  in- 
comes, on  the  excess  over  $4,000.  Incomes  under  this  amount 
were  exempt. 

Scarcely  had  the  tax  been  put  into  effect  when  it  was  sharply 
contested  and  the  matter  carried  to  the  Supreme  Court.  The 
Court  declared  the  income  tax  to  be  a  "direct  tax,"  and-there- 
fore  unconstitutional,  as  the  Constitution  provides  that  direct 
taxes  must  be  apportioned  among  the  states  according  to  their 
respective  numbers,  and  this  tax  was  not  so  apportioned.  The 
decision  was  somewhat  of  a  surprise,  for  all  the  former  decisions 
of  this  Court  had  concurred  in  calling  a  tax  on  incomes  an  "in- 
direct tax."  The  decision  was  based  on  a  misinterpretation  of 
the  meaning  of  the  founders  of  the  Constitution  in  regard  to  the 
words  "direct  taxes,"  and  it  was  reached,  moreover,  by  a  bare 
majority,  four  of  the  nine  members  of  the  Supreme  Court  voting 
against  it. 

This    decision    placed   the    government   in    the   uncomfortable 
position  of  being  unable  to  tax  incomes,  even  in  times  of  war  or 
similar   exigencies.      Dissatisfaction   and   criticism   were   general, 
and  the   feeling  grew  continually  that   something  must  be   done 
to   relieve  the  awkwardness  of  the   situation.     Two  alternatives 
presented  themselves  :  either,  to  frame  an  income  tax  law  which 
would  be  in  harmony  with  the  decision  of  the  Supreme  Court ; 
or,  to  amend  the  Constitution.     The  first  plan  seemed  less  feas-«. 
ible  as  time  went  on,  and  in  1908  the  Democratic  Party  embodied  J 
in  its  platform  a  resolution  to  the  effect  that  an  amendment  be/| 
adopted  giving  Congress  the  power  to  lay  an  income  tax. 

In  his  inaugural  address.  President  Taft  recommended  an 
inheritance  tax  to  provide  the  necessary  revenue  when  the  tariff 
was  no  longer  sufficient.  Accordingly,  a  provision  for  such  a 
tax  was  incorporated  into  the  new  tariff  bill  which  was  dis- 
cussed in  Congress  during  the  spring  of  1909.  The  demand  in 
the  west  for  an  income  tax  was  so  insistent,  however,  that,  as  a 
compromise,  the  inheritance  tax  was  dropped;  a  tax  of  1%  on  the 
dividends  of  corporations  was  substituted,  and  it  was  agreed  to 
submit   to   the   legislatures   of   the   States   an   amendment   to   the 


INCOME  TAX  7 

Constitution  giving  Congress  the  power  to  tax  incomes.  The 
language  of  this  proposed  (Sixteenth)  Amendment  is  as  fol- 
lows :  "Congress  shall  have  power  to  lay  and  collect  taxes  on 
incomes,  from  whatever  source  derived,  without  apportionment 
among  the  various  States,  and  without  regard  to  any  census  or 
enumeration." 

The  resolution  passed  the  Senate  on  July  5,  1909,  by  a  unani- 
mous vote,  and  the  House  a  week  later  by  a  majority  of  318  to  14. 
Alabama  was  the  only  state  to  ratify  the  amendment  in  1909,  but 
the  following  year  twelve  out  of  seventeen  states  holding  legis- 
lative sessions,  took  some  definite  action.  Eight  states  ratified 
the  amendment  and  four  rejected  it,  among  the  latter  being 
New  York  and  Massachusetts.  In  Louisiana,  Senate  and  House 
could  not  agree,  and  it  was  decided  to  submit  the  matter  to  the 
voters  at  the  next  primary  election.  Of  the  thirty-six  states  still 
to  vote  on  the  question,  all  but  two  were  to  have  legislative  ses- 
sions beginning  in  January,  191 1.  According  to  the  latest  in- 
formation available  at  this  writing,  fifteen  of  the  thirty-six 
states  have  ratified  the  amendment  and  seven  have  rejected  it.  In 
all,  twenty-four  states  have  ratified  tlie  amendment,  eleven  have 
rejected   it,   and   eleven   have   not  taken   action. 

To  ratify  an  amendment  to  the  Constitution  of  the  United 
States,  a  vote  of  three-fourths  of  the  States  must  be  secured  in 
its  favor.  Half  of  the  required  number  have  already  ratified  it. 
When  a  state  has  once  voted  in  favor  of  an  amendment,  it  has  no 
power  to  revoke  the  decision.  On  the  other  hand,  a  vote  against 
it  does  not  make  ratification  impossible  at  a  later  date.  The 
Maine  legislature  has  already  reversed  its  action  of  last  year, 
the  matter  has  come  before  the  legislatures  of  New  York  and 
Massachusetts  a  second  time,  and  the  question  will  probably  be 
kept  alive  until  the  necessary  number  of  favorable  votes  is  se- 
cured. No  limit  can  be  placed  on  the  period  within  which  an 
amendment  can  be  ratified,  and  it  is  beyond  the  power  of  Con- 
gress to  recall  an  amendment  that  has  once  been  submitted  to  the 
States. 


SELECTED  ARTICLES 

New  Encyclopedia  of  Social  Reform. 

William   D.  P.   Bliss,  editor. 

Income  Tax. 

The  income  tax  is  a  direct  levy  by  a  government  upon  tlie 
income  of  individual  citizens,  whether  that  income  is  received 
from  labor,  industry,  investments,  real  estate,  or  any  other 
source.  It  is  generally  computed  per  annum,  but  sometimes 
every  three  or  four  years. 

Some  technical  terms  and  phrases  pertaining  to  the  subject 
need  to  be  explained.  Exeviption  from  taxation  means  that 
small  incomes  are  free,  the  state  holding  that  the  amount  of 
income  required  for  the  maintenance  of  independence  and  of  the 
standard  of  living  should  not  be  taxed,  since  it  would  not  only 
have  to  return  in  the  form  of  charity  what  it  took  in  that  of 
taxes,  but  would,  moreover,  undermine  the  morale  of  its  citizens 
by  depriving  them  of  the  necessaries  of  life.  The  excess  only 
is,  consequently,  to  be  taxed.  Stoppage  at  source  has  to  do  with 
collection  of  the  tax.  It  indicates  that  the  tax  is  subtracted 
from  the  salary,  interest  on  bonds,  dividends  on  stock,  etc.,  owned 
by  the  payer.  The  paymaster  of  navy  and  army,  the  Bank  of 
England,  and  the  treasurers  of  corporations  in  England  always 
withhold  the  amount  of  the  tax  from  the  amount  due  the  payee. 
Uniform  or  proportional  taxation  means  that  all  incomes  are 
subject  to  the  same  rate,  e.  g..  i  per  cent,  or  3  per  cent.  A  tax 
is  called  graduated  or  progressive  when  the  rate  of  taxation 
increases  with  the  amount  of  income,  e.g.,  2  per  cent  on  $1,000 
and  .^  per  cent  on  $4,000.  Degressive  means  that  a  certain 
amount  of  taxable  income  is  exempt,  e.  g.,  in  England  a  man 
with    an    income   of   £400  has   £150   free   and   is   taxed   only  on 


lo  SELECTED   ARTICLES 

£250.  The  term  regressive  is  used  to  indicate  that  the  rate  of  tax- 
ation increases  as  income  decreases.  This  form  was  applied  in 
France  before  the  Revolution.  Taxation  may,  finally,  differen- 
tiate between  various  forms  of  income  and  tax  them  unequally ; 
e.  g.,  income  from  farm  land  is  taxed  at  a  lower  rate  in  Eng- 
land than  that  from  real  estate  in  the  cities.  The  differentiation 
may  extend  to  income  from  labor,  property,  permanent  and  tem- 
porary incomes,  investments  in  public  and  private  securities. 


American  Economist.  44:86.  August  20,  1909. 

Income  Tax  Experiences. 

London,  August  3,  1909. — One  of  the  greatest  objections  to 
the  income  tax  and  one  which  England  is  realizing  now  in  the 
,hard  school  of  experience  is  its  inelasticity.  Perhaps  that  is 
not  exactly  the  right  word  to  use,  for  it  has  a  tendency  to  stretch 
— one  of  the  qualities  of  elastic — but  never  to  contract.  Once  the 
tax  is  increased,  it  is  the  hardest  job  in  the  world  to  get  it 
reduced  again. 

Until  a  few  years  ago  it  was  the  theory  of  all  parties  in 
English  politics  that  the  income  tax,  or  at  any  rate,  all  but  a  very 
small  fraction  of  it,  was  a  war  tax.  In  fact  it  was  in  its  origin 
a  war  tax.  It  was  imposed  first  by  Parliament  during  the  great 
civil  war  of  1642,  when  money  was  needed  to  resist  the  illegal 
encroachments  of  the  Crown.  It  became  an  important  factor 
"in  the  English  fiscal  system  in  1798,  when  money  was  needed 
to  fight  the  French,  and  Sir  Robert  Peel  reimposed  it  in  1842 
when  he  was  driven  to  desperation  to  find  some  means  of  rais- 
ing revenue  to  take  the  place  of  the  protective  system  which 
was  then  threatened.  Protection  fell  in  England  four  years 
later,  and  since  then  the  income  tax  has  been  a  fixture. 

Some  idea  of  the  incapacity  of  the  income  tax  to  contract 
after  it  has  been  stretched  may  be  gleaned  from  the  experience 
of  England  since  the  Boer  war.  Before  the  war  the  tax  stood  at 
eight  pence  in  the  pound,  which  is  equivalent  to  16  cents  on 
every  five  dollars  of  income.  When  the  war  began,  the  tax  was 


INCOME  TAX  II 

rapidly  increased  until  it  stood  at  30  cents  in  the  pound,  and 
there  it  remained  for  a  number  of  years,  until  finally  public 
clamor  became  so  great  that  it  was  reduced  to  25  cents.  When 
the  Liberal  government  came  into  power  in  1906,  it  was  elected, 
among  other  things,  on  its  promise  to  reduce  the  income  tax. 
For  the  first  year,  however,  it  did  nothing,  but  in  1908  the  public 
became  so  insistent  that  it  was  forced  to  bring  the  tax  down  to 
18  cents  on  earned  incomes  below  $5,000  a  year.  Unearned 
incomes  of  any  amount  and  earned  incomes  above  $5,000  must 
still  pay  at  the  rate  of  25  cents,  and  on  larger  incomes,  Lloyd 
George,  the  Chancellor  of  the  Exchequer,  has  this  year  imposed 
a  super  tax  at  the  rate  of  36  cents,  so  that  for  some  people  the 
tax  is  higher  than  ever.  He  has  also  thrown  out  a  net  which 
has  gathered  in  a  large  number  of  workingmen  whose  more  or 
less  precarious  earnings  just  bring  them  within  the  income  tax 
paying  class,  and  he  is  getting  more  money  than  ever  before. 

Serious  economists  in  England  are  gravely  alarmed  at  the 
present  fiscal  situation.  If  there  were  to  be  a  great  European 
war  to-morrow,  and  England  were  to  be  involved,  no  one  knows 
■where  the  money  would  be  found,  for  the  income  taxpayers  are 
bearing  their  full  burden  now,  and  a  penny  or  two  more  might 
prove  the  straw  that  would  break  their  backs.  Free-trade  finance 
has  reached  its  limit.  The  tax  that  ought  to  be  reserved  for 
great  national  emergencies,  has  been  used  as  an  evcry-day  means 
of  raising  revenue,  and  there  is  no  reserve  left. 

American  Journal  of  Politics,  3:  650-4.  December,  1893. 
Graduated  Income  Tax.    John  J.  O'Neill. 

The  people  of  the  United  States  in  the  congressional  election 
of  1890  and  the  presidential  election  of  1892  declared  overwhelm- 
ingly in  favor  of  a  radical  reduction  of  tariff  taxes. 

Their  decree  must  be  obeyed ;  but  when  wc  come  to  consider 
the  ways  and  means  of  carrying  it  out  we  arc  I)rought  face  to 
face  with  a  state  of  things  which  must  be  provided  for  before 
we  are  in  a  position  to  place  in  operation  any  scheme  of  general 
tax  reduction. 

The  treasury  of  the  United  States  is  almcst  empty.     It  is  un- 


12  SELECTED   ARTICLES 

necessary  to  discuss  the  question  of  the  responsibility  for  this 
condition  of  affairs.  We  know  that  it  exists,  and  the  only  point 
to  be  considered  is  as  to  the  remedy  which  should  be  applied. 
,In  the  language  of  the  present  chief  executive  of  the  nation, 
uttered  when  a  problem  quite  as  intricate  and  important  as  that 
which  is  now  before  us  was  submitted  to  the  country  for  deci- 
sion, "It  is  a  condition  that  confronts  us,  not  a  theory." 

On  the  one  hand,  we  have  the  positive  declaration  of  the  peo- 
ple of  the  United  States,  expressed  in  two  congressional  elec- 
tions, that  the  tariff  must  be  radically  reformed;  on  the  other, 
we  have  a  condition  of  things  which  renders  it  necessary  that 
before  the  reform  which  the  people  have  demanded  can  be  car- 
ried into  effect,  some  method  of  taxation  must  be  devised  which 
will  make  up  for  the  loss  of  revenues  which  the  revision  of  the 
tariff  laws  will  entail. 

A  form  of  tax  which  commends  itself  strongly  to  thinking 
people,  and  which  is  rapidly  growing  in  popular  favor,  is  that 
which  is  intended  to  be  imposed  on  large  incomes  and  which 
varies  according  to  the  amount  of  income  taxed.  This  is  known 
as  the  graded  or  graduated  income  tax. 

The  principle  on  which  the  imposition  of  an  income  tax  is 
based  is  that  laid  down  by  Adam  Smith,  that  "the  subjects  of 
every  state  ought  to  contribute  to  the  support  of  government 
as  nearly  as  possible  in  proportion  to  their  respective  abilities, 
that  is,  in  proportion  to  the  revenue  which  they  respectively 
enjoy  under  the  protection  of  the  state."  *— ' 

The  justice  and  fairness  of  this  doctrine  are  so  apparent  as 
hardly  to  be  open  to  argument.  No  one  can  question  the  equity 
of  a  law  which  results  in  placing  the  burden  of  taxation  on  the 
backs  of  those  who  are  best  able  to  Dear  it  and  who  receive  the 
greatest  amount  of  benefit  and  protection  at  the  hands  of  the 
state ;  and  these  are  the  persons  who  would  be  reached  by  means 
of  an  income  tax,  for  it  is  intended  to  impose  this  tax  only  on 
incomes  exceeding  a  certain  amount,  which  amount  shall  be  suffi 
ciently  large  to  practically  exempt  from  taxation  all  persons  pos- 
sessing only  a  small  or  even  a  moderate  income. 

As  stated  before,  such  a  tax,  if  imposed,  would  be  graded  in 
proportion   to   the   amount   of   income.     A   tax   of   one   per   cent 


I 


INCOME  TAX  13 

might  be  imposed  on  incomes  of,  let  us  say,  ten  thousand  dollars, 
the  rate  of  tax  increasing  as  the  amount  of  income  taxed  grows 
larger,  until  an  income  of  one  hundred  thousand  dollars  would 
be  subject  to  a  tax  of  ten  per  cent. 

Such  a  system  as  this  would  be  eminently  just  and  proper. 
The  man  who  enjoys  an  annual  income  of  one  hundred  thousand 
dollars  can  pay  for  the  purposes  of  the  state  ten  thousand  dollars 
out  of  that  income  without  experiencing  the  smallest  measure  of 
hardship  as  a  result  of  being  compelled  to  pay  such  tax.  Such 
could  not  be  said,  however,  of  the  individual  with  one  thousand 
dollars  a  year,  were  he  called  upon  to  yield  one  hundred  dollars 
therefrom  for  purposes  of  taxation. 

One  of  the  principal  arguments  advanced  by  the  opponents 
of  this  tax  is  based  on  its  alleged  impracticability.  In  order  to 
refute  this  claim  it  is  only  necessary  to  point  to  the  experience  of 
the  past  in  this  regard. 

In  the  United  States  a  law  imposing  an  income  tax  went  into 
effect  July  i,  1862,  and  continued  in  force  until  December  31, 
1871,  when  it  expired  by  limitation.  The  rate  of  tax  varied  at 
different  times  during  this  period.  At  the  beginning  it  was  placed 
at  three  per  cent  on  incomes  over  eight  hundred  dollars,  at 
which  rate  the  sum  of  twenty  millions  of  dollars  was  raised  in 
1864.  In  1865  thirty-two  million  dollars  was  raised.  In  1866  the 
tax  rate  was  increased  to  five  per  cent  on  sums  over  six  hundred 
dollars  and  less  than  five  thousand  dollars,  and  ten  per  cent  on 
incomes  in  excess  of  the  latter  amount.  As  a  result  of  this 
increase  of  rate  over  seventy-two  millions  of  dollars  was  raised 
during  that  year.  This  amount  was  collected  from  the  following 
sources : 

Dividends  of   banks $4,240,664 

Dividends   of   insurance   companies 783,882 

Dividends  of   railroad   companies    3,461,769 

Canal  and  turnpike  companies 230,567 

Salaries  of  officers  of  national  government 3.717,396 

Account    of    all    other    incomes    exceeding   $600    and 

under  $5,000,   at  5   per  cent 26,046,760 

Incomes  of  $5,000  and  over,  at  10  per  cent 34,501,126 

Total    amount    collected $72,(>82,i64 


14  SELECTED   ARTICLES 

This  was  the  greatest  amovint  received  in  any  one  year  during 
the  period  in  which  this  law  was  in  operation,  but  the  payments 
continued  good  until  the  end  of  the  period,  the  total  amount  col- 
lected in  the  nine  and  a  half  years  during  which  the  tax  was 
levied  being  upwards  of  three  hundred  and  fifty  millions  of  dol- 
lars. 

When  we  bear  in  mind  the  fact  that  during  a  large  portion 
of  this  time  the  Civil  War  was  raging  and  business  and  financial 
affairs  generally  were  in  a  state  of  extreme  disquietude,  we  can- 
not fail  to  marvel  at  the  amount  raised  by  means  of  this  tax. 
There  can  be  no  doubt  that  if  imposed  at  the  present  time  the 
income  tax  would  yield  a  revenue  very  far  in  excess  of  that 
derived  from  it  thirty  years  ago. 

In  Great  Britain,  with  a  population  of  only  about  thirty-five 
millions,  about  eighty  million  dollars  was  collected  in  1888  by 
means  of  an  income  tax  law,  the  rate  at  the  time  being  eight 
pence  on  the  pound.  At  the  rate  of  six  pence  per  pound  it  is 
estimated  that  seventy-five  million  dollars  will  be  collected  during 
the  present  fiscal  year.  This  tax  is  levied  only  on  incomes  ex- 
ceeding one  hundred  and  fifty  pounds.  It  was  first  imposed 
over  a  hundred  years  ago.  On  an  average  one  fifth  of  the  rev- 
enues of  the  government  are  derived  from  this  source. 

In  Italy,  France  and  Germany  experience  with  this  form  of 
tax  has  led  to  its  permanent  adoption.  In  the  last  mentioned 
country  the  experience  of  Prussia,  as  given  by  Dr.  Barth,  of 
Berlin,  is  that  the  tax  "had  been  introduced  recently  in  Prussia 
and  was  working  well  in  every  particular,  as  the  tax  affected 
only  those  fortunes  well  able  to  bear  it."  Dr.  Barth  advocates 
its  adoption  to  meet  the  extra  expense  of  increasing  the  German 
army. 

Other  instances  may  be  cited,  but  enough  has  been  shown, 
in  my  opinion,  to  demonstrate  that  the  argument  against  this 
tax  based  on  its  alleged  impracticability  rests  on  an  insecure 
foundation. 

Another    allegation    frequently   brought    forward    against   the 
income  tax  is  that  it  involves  an  impertinent  prying  into  the  pri- 
vate affairs  of  the  citizen  and  would  necessitate  a  spy  system. 
It  would  be  difficult  indeed  to  conceive  of  a  state  of  affairs 


INCOME  TAX  15 

in  which  spying  and  impertinent  scrutiny  of  the  private  concerns 
of  citizens  could  be  carried  to  a  greater  extent  than  in  our  pres- 
ent tariff  and  internal  revenue  systems.  The  operation  of  the 
customs  laws  proceeds  on  the  theory  that  all  importers  are  prob- 
ably seeking  to  defraud  the  government.  They  are  required  to 
furnish  details  as  to  the  cost,  place  of  manufacture,  etc.,  of  every 
article  imported.  The  baggage  of  travelers  arriving  on  our 
shores,  and  even  their  persons  are  subject  to  the  scrutiny  of 
customs  officials. 

Under  the  internal  revenue  laws  every  brewer,  distiller,  and 
manufacturer  of  tobacco  must  disclose  the  details  of  his  private 
business  under  heavy  penalties  in  the  event  of  false  or  fraudu- 
lent representations.  The  present  laws  for  taxing  personal  prop- 
erty are  subject  to  this  objection  equally  with  an  income  tax  law. 

So  that  it  is  obviously  out  of  place  for  any  one  who  approves 
of  any  of  these  forms  of  taxation  to  denounce  the  income  tax 
as  involving  an  improper  scrutiny  into  the  private  affairs  of  in- 
dividuals. All  direct  taxes,  whether  upon  personal  property, 
incomes  or  even  upon  real  estate,  must  from  their  very  nature 
be  more  or  less  inquisitorial,  and  the  income  tax  is  no  more  open 
to  this  objection  than  the  others  mentioned,  if  indeed  it  is  as 
much  so. 

The  idea  sometimes  advanced  that  the  graduated  income  tax 
is  an  empty  dream  of  visionary  enthusiasts  is  not  only  refuted  by 
the  facts  already  given  as  to  its  results  wherever  placed  in  oper- 
ation, but  it  is  condemned  out  of  the  mouths  of  statesmen  and 
financiers  who  are  the  idols  and  oracles  of  the  very  persons  who 
raise   this   senseless   cry. 

In  1864,  William  P.  Fesscnden,  then  secretary  of  the  treasury, 
said  in  his  report : 

The  adoption  of  a  scale  increasing  the  rates  of  taxation  as  they 
rise  In  amount,  though  unequal  in  one  sense,  cannot  be  considered 
oppressive  or  unjust,  inasmuch  as  the  ability  to  pay  increases  in 
much  more  than  arithmetical  proportion  as  the  amount  of  income 
exceeds   the   limit  of  reasonable   necessity. 

John   Sherman   in   1882  cxjircsscd   himself   on   this   subject  as 

follows : 

The  public  mind  is  not  yet  prepared  to  apply  the  key  to  a  gen- 
uine revenue  reform.  A  few  years  of  fuithcr  experience  will  con- 
vince the  whole  body  of  our  people  that  a  system  of  natioiiiil  ta.\es 
which  rests  the  whole  burden  of  taxation  on  consumption,  and  not 


i6  SELECTED   ARTICLES 


one  cent  on  property  or  incomes,  is  intrinsically  unjust.  While  the 
expenses  of  the  national  government  are  largely  caused  by  the  pro- 
tection of  property,  it  is  but  right  to  require  property  to  contribute 
to  their  payment.  It  will  not  do  to  say  that  each  person  consumes 
in  proportion  to  his  means.  This  is  not  true.  Every  one  must  see 
that  the  consumption  of  the  rich  does  not  bear  the  same  relation  to 
the  consumption  of  the  poor  as  the  income  of  the  one  does  to  the 
wages  of  the  other.  ...  As  wealth  accumulates,  this  injustice  in 
the  fundamental  basis  of  our  system  will  be  felt  and  forced  upon 
the  attention  of  Congress. 

It  may  thus  be  seen  that  there  are  some  among  the  advocates 
of  an  income  tax  who,  whatever  their  faults,  cannot  justly  be 
stigmatized  as  long-haired  enthusiasts. 

The  fairness  and  justice  of  the  graduated  income-tax  are 
beyond  question,  it  has  been  indorsed  by  financiers  of  eminence, 
and  the  main  objections  advanced  in  opposition  to  it  being  found- 
ed on  contentions  which  are,  as  has  been  shown,  without  merit, 
the  speedy  enactment  by  Congress  of  a  law  providing  for  the  im- 
position of  this  most  just  of  taxes  is  much  to  be  desired. 


American  Journal   of   Politics.  4:496-504.   May,    1894. 

Income  Tax.     W.  T.  Button. 

It  is  an  act  of  arbitrary  power,  under  whatever  form  of  gov- 
ernment it  may  be  done,  to  exempt  any  man  from  a  certain  tax 
because  he  has  in  his  possession  less  than  a  certain  amount  of 
the  property  which  is  taxed.  Certain  small  incomes  cannot  be 
taxed;  for  whatever  the  government  takes  with  one  hand  as 
a  tax  must  be  returned  by  the  other  hand  as  a  charity.  Public 
policy,  therefore,  exempts  all  incomes  below  the  cost  of  sup- 
porting a  family.  An  exemption  of  $4,000  is  an  unwarranted 
favoritism  to  nine-tenths  of  the  well-to-do  people  of  the  United 
States.  Assuming  5  per  cent  as  the  average  profit  of  money  or 
other  property  in  this  country,  a  man  whose  income  is  $1,000  en- 
joys an  estate  worth  $20,000,  while  the  more  fortunate  posses- 
sors of  incomes  ranging  from  $1,500  to  $4,000,  enjoy  estates 
ranging  from  $30,000  to  $80,000.  These  are  not  poor  people. 
They  are  abundantly  able  to  pay  their  fair  share  of  all  the  taxes 
the  government  may  find  it  necessary  to  levy  for  its  support.  It 
is   difficult   to   justify  such   an  exemption   on   any   but   socialistic 


INCOME  TAX  17 

grounds.  It  is  not  difficult,  however,  to  prophesy  that  the  next 
turn  of  the  wheel  will  correct  this  evil,  in  part  at  least,  and 
include  among  the  victims  of  this  tax  some  who  now  escape. 

The  justice  of  the  income  tax  may  well  be  questioned.  It 
is  well  known  that  the  purchasing  power  of  a  given  income 
varies  greatly  in  different  localities.  A  family  can  be  supported 
far  more  comfortably  on  $3,000  in  Aleadville  than  on  $5,000  in 
New  York.  The  Meadville  family  is  far  the  wealthier  of 
the  two.  Yet  it  escapes  the  tax,  while  the  New  York  family 
pays  $20  for  the  privilege  of  paying  $2,000  more  for  a  poorer 
living.  The  same  inequality  exists  between  other  sections  of 
the  country.  It  is  evident  that  men  in  different  localities  are 
not  taxed  according  to  their  financial  ability,  but  by  a  standard 
extremely  variable  in  its  nature.  The  principle  of  "equality 
of  sacrifice"  which  the  advocates  of  the  tax  insist  upon  as  vital, 
is  palpably  violated.  Yet  it  is  from  these  sections,  where  the 
necessarily  larger  cost  of  living  makes  the  incomes  nominally 
larger,  that  the  greater  part  of  the  revenues  derived  from  this  tax 
must  come. 


Blackwood's  Magazine.   178:  279-84.  August,  1905. 

Tyranny  of  the  Income  Tax. 

But  it  is  not  in  favour  of  this  class  or  that,  that  we  would 
condemn  the  income-tax.  It  is  as  bad  for  those  who  arc  exempt 
as  for  those  upon  whom  it  is  levied.  To  absolve  the  greater 
part  of  the  people  from  responsibility  is,  as  we  have  said,  not 
the  way  to  make  thrifty,  industrious  and  patriotic  citizens.  To 
thrust  a  great  burden  upf)n  a  small  class  is  not  the  way  to  pro- 
duce cheerful,  eager  contributors  to  the  national  revenue.  Worse 
still,  a  tax  which  cannot  be  levied  without  the  gossip  of  hired 
spies  and  eavesdroppers,  which  combines  the  sly  method  of  the 
Inquisition  with  the  manners  of  the  footpad,  needs  no  eloquence 
to  condemn  it.  And  when  Air.  Chamberlain  has  carried  the 
country  with  him,  when  once  again  we  shall  be  able  to  protect 
our  own  industries  and  to  retaliate  upon  the  exclusive  policy  of 


iS  SELECTED   ARTICLES 

our  neighbours,  not  the  least  advantage  of  the  fiscal  reforms 
will  be  the  abolition,  save  in  times  of  v^^ar,  of  the  most  dis- 
honourable and  humiliating  tax  that  has  ever  been  put  upon  a 
willing  and  generous  nation. 


Boston  Evening  Transcript.  March  lo,  igog. 

New  French  Tax  System. 

The  government's  new  scheme  for  taxation  was  introduced 
in  the  Chamber  of  Deputies  in  February,  1907,  and  constitutes 
a  radical  readjustment  of  France's  fiscal  system.  The  old  door, 
window,  poll  and  other  direct  taxes  are  to  be  replaced  by  a 
system  based  upon  incomes.  Day  laborers  are  practically  ex- 
empted. The  tax  on  incomes  above  $1,000  a  year  is  made  pro- 
gressive up  to  four  percent  of  the  total.  Even  government 
rentes  (securities),  excepting  those  held  abroad,  only  nominally 
escape,  the  coupons  themselves  being  exempt,  but  the  revenues 
therefrom  being  taxed  when  the  total  income  of  the  holder  ex- 
ceeds the  minimum  laid  down.  French  savings  are  largely  in- 
vested in  rentes.  The  burdens  placed  upon  foreign  securities, 
both  private  and  governmental,  are  onerous,  and  constitute  a 
particularly  heavy  blow  to  Russian  securities,  of  which  it  is 
estimated  that  from  eight  to  ten  millions  are  held  in  France. 

Only  half  a  million  families  are  afifected  by  the  higher  pro- 
gressive income  feature,  which  alone  Finance  Minister  Caillaux 
estimates  will  produce  $24,000,000  a  year.  The  other  9,500,000 
taxable  families  of  France  are  composed  of  "petits  rentiers" 
who  live  upon  modest  savings  that  produce  less  than  $1,000 
a  year  and  which  are  liable  to  the  lower  rate  of  taxation.  The 
income  tax  measure  is  a  combination  of  the  system  of  direct 
taxation  upon  incomes  from  whatever  source,  supplemented  by  a 
progressive  general  tax  ranging  from  one-half  of  one  percent 
to  four  percent  upon  total  incomes  in  excess  of  $1,000. 

The  new  measure  divides  the  taxes  into  seven  categories. 
The  first  three  pay  4  percent,  and  include  real  property  and  the 
income   from  capital,   stocks,  bonds,   etc.,   except  savings  banks 


INCOME  TAX  19 

deposits ;  the  next  two  categories  pay  3J/2  percent,  and  cover  the 
income  from  profits  from  commercial  and  industrial  undertakings 
and  from  production ;  the  sixth  and  seventh  categories  pay  3  per- 
cent, and  include  salaries,  pensions  and  life  annuities  above  1250 
francs. 

The  government's  estimate  of  the  revenue  from  the  new  taxes 
gives  a  total  of  694,000,000  francs. 


Congressional    Record.    31:  appendix    381-5. 

Income  Tax — Its  Relations  to  Political  Economy,  to  the  Consti- 
tution, and  to  the  Supreme  Court  Decision.    Delivered 
April  29,   1898  by  William  Henry  Fleming. 

It  is  well  worthy  of  note  that  a  tax  on  incomes  has  this 
striking  advantage  over  a  tax  on  commodities  that  are  bought  and 
sold,  namely,  its  rate  can  be  raised  or  lowered  to  meet  exigencies 
of  revenue  without  appreciably  disturbing  prices.  Change  ever  so 
little  the  rate  of  your  tariff  or  excise  tax,  and  immediately  there 
is  a  fluttering  of  prices  in  the  market,  business  is  upset,  and 
speculation  becomes  rife,  with  its  attendant  evils.  But  a  change 
in  the  tax  rate  on  incomes  could  produce  no  such  result.  The 
pulse  of  commercial  life  would  beat  on  with  normal  stroke. 

■^  Low  Cost  of  Collection. 

Again,  the  low  cost  of  collecting  an  income  tax  in  connection 
with  our  present  excise  system  must  commend  it  to  our 
favorable  consideration.  According  to  the  highest  official  author- 
ity the  cost  of  collecting  the  income  tax  in  1866  was  less  than  2 
per  cent,  being  lower  than  the  cost  of  collecting  any  tax 
then  existing  except  that  on  banks,  which  was  paid  directly  at 
the  treasury. 


20  SELECTED  ARTICLES 

Congressional   Record.   43:   2842-3,   February   20,    1909. 
Income  Tax.    Gilbert  M.  Hitchcock. 

There  is  a  method  of  taxation  . . .  which  involves  no  in- 
crease in  the  cost  of  living  to  the  American  people,  no  restraint 
on  any  industry.  It  is  a  method  which  has  gone  through  more 
than  a  century  of  trial  in  European  countries — a  method  which 
has  been  used  in  Great  Britain  since  1798  off  and  on,  and  which 
has  been  used  in  Great  Britain  constantly  since  1842.  It  is  a 
method  which  has  been  used  and  is  now  in  use  in  Prussia,  in 
Austria,  and,  I  think,  also  in  Italy  and  Switzerland. 

It  is  the  income  tax,  a  tax  which  at  the  present  time  is  raising 
for  the  use  of  the  British  government  $162,000,000  a  year  on 
a  5  per  cent  basis,  a  tax  which  was  tried  in  the  United  States 
from  1863  to  1874,  a>id  which  during  that  time  raised  a  total 
of  $346,908,000,  a  tax  which  has  stood  the  test  of  the  Supreme 
Court  on  many  occasions.  A  subsequent  income  tax  was  only 
declared  invalid  by  a  doubtful  and  divided  court  by  a  decision 
in  the  Pollock  case.  ]\Ir.  Chairman,  the  income  tax  is  not,  as 
most  of  our  present  national  taxes  are,  a  tax  on  consumption. 
It  is  not  a  tax  which  increases  the  cost  of  living  to  the  people 
of  the  country,  as  most  of  our  national  taxation  does,  and  it  is 
a  tax  which,  with  peculiar  propriety,  calls  upon  the  people  in 
proportion  to  the  benefits  which  they  derive  from  the  protection 
of  the  government,  and  which  falls  upon  them  also  in  proportion 
to  their  ability  to  pay.  .  I  have  no  doubt  that  if  we  levied  a  tax 
of  only  2  per  cent  on  the  incomes  exceeding  $1,000,  this  govern- 
ment can  secure  a  revenue  greater  than  the  government  of 
Great  Britain  derives  from  its  tax  of  5  per  cent.  It  would  more 
than  make  up  the  deficit.  It  would  give  us  all  the  additional 
revenue  that  we  require.  This  revenue  which  can  be  raised 
in  this  way  will  not  fall  upon  the  people  in  proportion  to  what 
they  consume,  as  is  now  the  case  with  practically  all  of  our 
national  revenues,  but  it  will  fall  upon  them  as  I  have  stated, 
in  proportion  to  the  benefits  which  they  derive  from  the  govern- 
ment, and  also  in  proportion  to  their  ability  to  pay. 

Mr.    Chairman,    it    is    one    of    the    crying    disgraces    of    this 


INCOME  TAX  21 

country  that  wealth  does  not  share  its  proper  portion  of  the 
burdens  of  government.  It  escapes  in  all  great  cities,  it  es- 
capes in  state  taxes  to  a  large  extent,  and  when  we  come  to 
the  national  revenues,  it  escapes  completely.  These  millions 
which  w^  raise  every  year,  these  eight  or  nine  hundred  millions 
of  dollars  in  taxes  which  we  levy  upon  the  people  of  the  United 
States,  fall  as  a  burden  upon  individuals  and  not  as  a  burden 
upon  wealth.  They  are  levied  almost  in  a  per  capita  method 
of  taxation,  so  that  this  great  government,  bringing  prosperity 
to  the  people  of  the  United  States  in  great  disproportion,  is 
not  supported  by  the  people  of  the  United  States  in  proportion 
to  the  benefits  which  they  derive,  but  is  supported  by  them 
practically  as  it  would  be  supported  if  we  levied  a  per  capita 
tax. 

Congressional  Record.  44:  1692-1704.  May  3,  1909. 

Income  Tax.  Joseph  Weldon  Bailey. 

I  now  come  to  state,  and  I  shall  state  them  as  briefly  as 
I  can,  the  reasons  which  have  induced  me  to  believe  that  an 
income  tax  ought  to  be  adopted  as  a  settled  and  permanent  part 
of  our  fiscal  policy.  The  extraordinary  increase  in  our  pub- 
lic expenditures  during  the  last  twenty  years  has  rendered 
it  necessary  for  us  to  collect  in  every  year  a  sum  of  money  so 
great  as  to  almost  confuse  the  human  mind;  and,  of  course. 
the  people  must  supply  this  money  irTsome  way.  In  search- 
ing for  that  way  I  could  find  no  better  one  than  that  wliich 
I  am  proposing.  Under  any  circumstances  an  income  tax  is 
more  equitable  than  a  tax  on  consumption.  It  is  more  just 
as  between  the  different  classes,  and  it  better  conforms  to 
that  sound  canon  of  taxation  which  enjoins  upon  us  to  lay 
all  taxes  on  those  who  can  bear  them  with  the  least  incon- 
venience ;  and  this  general  advantage  is  emphasized  by  our 
present  condition,  for  the  cost  of  living  has  increased  so  enof- 
nif»usly  during  the  last  few  years  that  the  plainest  dictates 
of  humanity  require  some  abatement  in  the  taxes  on  articles 
of  necessary  and  daily  use. 


/ 


22  SELECTED   ARTICLES 

I  have  laid  this  tax  on  no  one  whose  income  does  not 
exceed  $5,000 ;  and  certainly  no  truthful  man  can  look  his 
neighbor  in  the  face  and  say  that  with  an  income  of  more 
than  $5,000  he  will  be  seriously  embarrassed  by  the  payment 
of  a  moderate  tax  to  the  general  government.  Under  my 
amendment  an  income  of  $10,000  would  only  be  required  to 
contribute  $150  to  the  general  treasury. 

Under  the  Republican  policy  of  protection  a  man  is  taxed 
on  almost  everything  he  consumes,  and  I  have  fixed  the  ex- 
emption at  $5,000  on  the  theory  that  an  income  of  that  amount 
is  consumed,  and  having  paid  a  tax  to  the  government,  or  a 
tribute  to  its  favorites  in  spending  it,  I  thought  it  was  simple 
fairness  not  to  tax  him  when  he  was  earning  it.  In  other 
words,  I  let  him  take  it  in  without  a  tax  because  I  knew  he 
had  to  pay  a  tax  when  he  paid  it  out ;  and  assuming  that  a 
$5,000  income  was  a  consumable  one,  'I  exempted  it  from  the 
tax.  But  that  is  not  all.  I  was  following  the  rule  of  laying 
a  tax  on  those  who  can  bear  it  with  the  least  inconvenience, 
and  I  fixed  the  exemption  at  $5,000  so  that  no  man  could  com- 
plain that  the  government  is  taking  something  from  him  which 
he  needs. 

I  did  not  forget,  Mr.  President,  that  in  our  larger  cities 
a  man  must  have  an  income  of  well  nigh  $5,000  to  live  in  com- 
fort and  educate  his  children,  and  I  do  not  want  any  man 
to  have  a  right  to  say  that  in  taking  this  tax  for  the  govern- 
ment's support  I  have  either  taken  from  his  wife  a  comfort 
or  taken  from  his  children  the  priceless  blessing  of  an  edu- 
cation ;  and  no  man  can  say  either  under  this  exemption  of 
$5,000.  The  senator  from  Rhode  Island  knows  as  well  as  I 
do  that  in  a  large  family  the  education  of  the  girls  and  boys 
costs  almost  half  an  income  of  $5,000.  Maybe  it  ought  not 
to  be  so,  and  let  us  hope  that  it  will  not  always  be  so ;  but  it 
is  so,  and  I  was  dealing  with  conditions  as  I  found  them  and 
not  as  I  would  like  to  have  them. 

Mr.  ALDRICH.  The  great  masses  of  the  laboring  people  in 
this  country  are  to-day  competing  with  labor  which  is  paid 
6  cents  a  day,  25  cents  a  day,  60  cents  a  day,  or  an  income 
of    say    from    fifty    to    three    or    four    hundred    dollars  _4   year. 


INCOME  TAX  23 

The  average  earnings  of  the  laboring  people  of  this  country 
are,  as  I  have  already  stated,  less  than  a  thousand  dollars  a 
year,  or  about  $700,  as  I  remember  them.  Xow  you  are  sug- 
gesting to  those  men  that  you  will  not  tax  to  any  extent  the 
man  who  earns  two,  three,  four,  five,  or  ten  times  as  much 
as  they  do,  a  hundred  times  as  much  as  the  people  who  com- 
pete with  them  in  the  various  industries  in  which  they  are 
engaged,  and  that  you  propose  to  levy  those  taxes  upon  the 
higher  class  of  earnings  in  the  United  States,  for  the  purpose 
of  reducing  the  protection  which  by  law  and  by  the  declared 
policy  of  our  party  we  now  give  them. 

Mr.  BAILEY.  Mr.  President,  the  laboring  man  who  receives 
only  S700  a  year,  has  no  right  to  complain  because  we  do  not 
tax  the  man  who  receives  seventeen  hundred.  If  we  taxed  him 
and  exempted  somebody  else,  tlien  he  would  have  a  full  right 
to  condemn  us  for  that  discrimination,  but  so  long  as  we  lay 
no  tax  on  him,  he  has  no  right  to  complain  because  we  do  not 
begin  to  tax  the  others  until  we  pass  the  point  which  the  highest 
comfort  seems  to  require. 

Xot  only  is  an  income  tax  more  equal  than  any  other  as 
between  all  taxpajers,  but  it  is  more  just  as  between  every 
taxpayer  and  the  government,  or  at  least  it  can  be  paid  more 
conveniently. 

Under  the  system  of  ad  valorem  taxation  a  citizen's  property 
might  be  assessed  at  ?ioo,ooo — it  might  be  a  magnificent  build- 
ing filled  with  tenants,  at  good  rents  and  of  prompt  pay. 
That  building  might  yield  $15,000  per  annum  when  occupied; 
but.  if  the  day  after  the  assessment  became  operative,  a  de- 
structive fire  should  gather  it  in  its  hot  embrace  and  lay  it 
down  a  mass  of  charred  and  blackened  ruins,  under  a  system 
of  ad  valorem  taxation  the  owner  would  be  compelled  to  pay  the 
same  taxes  on  it,  though  it  would  bring  him  nothing  that  year, 
as  he  would  have  paid  had  it  survived  the  conflagration  and 
yielded  him  a  revenue  of  $J5,ooo  a  year.  It  is  not  so  under  an 
income  tax,  which  rises  and  falls  with  each  man's  ability  to 
pay  it.  If  the  property  that  last  year  fetched  the  owner  $15,000 
should  be  destroyed  or  be  vacant  the  better  part  of  this  year, 
and  the  income  should  shrink  to  $3,000.  the  taxes  would  shrink 


24  SELECTED  ARTICLES 

with  it.  Under  the  $15,000  income,  he  would  enjoy  his  $5,000 
exemption  and  pay  3  per  cent  only  on  his  $10,000  excess,  which 
he  could  well  afford  to  pay,  but  under  a  condition  where  it 
netted  him  only  $3,000,  his  income  from  it  would  not  reach  the 
limit  of  exemption,  and  he  would  not  pay  a  farthing  toward  the 
government's  support.  An  income  tax  is  only  exacted  when 
the  citizen  is  able  to  pay,  and  the  exaction  is  measured  by  his 
ability  to  pay. 

But  to  all  this  our  opponents  answer  that  the  tax  is  in- 
quisitorial and  would  make  us  a  "nations  of  liars." 

Even  if  what  they  say  in  that  regard  is  true,  it  is  not  more 
true  of  this  than  it  is  of  every  other  law  that  levies  taxes. 
Every  tax  law  inquires  closely  into  our  financial  condition,  and 
some  men  will  swear  a  lie  to  evade  any  tax;  but  this  is  charge- 
able against  the  nature  of  taxation  and  against  the  depravity 
of  man,  and  not  against  this  particular  kind  of  tax.  It  no 
more  violates  the  privacy  of  your  business  afifairs  to  compel  you 
to  state  your  income  and  the  sources  of  it  than  it  does  to  compel 
you  to  list  every  piece  of  your  property,  including  the  personal 
ornaments  and  jewelry  of  your  wife,  as  you  are  now  required 
to  do  in  all  the  states.  Not  only  are  all  taxes  inquisitorial, 
but  they  must  be  so,  or  otherwise  the  honest  men  would  pay 
them  and  the  dishonest  men  would  cheat  the  law.  I  do  not  like 
to  have  a  tax  assessor  ask  me  for  an  inventory  of  my  property, 
but  I  give  it  without  objection,  and  I  would  state  my  income 
as  freely  as  I  would  describe  the  property  from  which  I  derive 
it.  I  have  sought  in  this  amendment — and  to  that  extent  it  is 
a  copy  of  the  other  laws — to  guard  the  business  of  every  citizen 
against  the  idle  curiosity  of  gossips,  and  I  have  made  it  a  crime 
for  any  officer  or  employe  of  the  government  to  divulge  except 
under  proper  conditions,  the  return  which  a  citizen  must  make 
to  the  internal-revenue  collector.  This  is  a  protection  which  is 
not  extended  in  all  the  states. 

Why  should  an  income  tax  make  us  "a  nation  of  liars"  any 
more  than  our  tariff  or  our  present  internal-revenue  taxes? 
There  is  nothing  about  an  income  which  it  is  so  necessary  to 
conceal,  and  certainly  an  income  tax  is  not  more  difficult  to 
pay   because    it    is    never    demanded    from    a    citizen    unless   his 


INCOME  TAX  25 

business  shows  a  profit.  It  calls  none  to  the  collector's  office 
except  those  who  have  enjoyed  a  prosperous  year,  and  surely 
a  man  whose  enterprises  have  yielded  him  a  profit  will  not 
commit  a  perjury  to  save  a  moderate  tax.  I  feel  as  certain  as 
I  do  of  any  event  which  is  yet  to  come  that  the  income  tax  will 
be  paid  as  honestly  and  as  promptly  as  other  taxes  are,  and  I 
repel  as  a  libel  on  the  American  character  this  oft-repeated  as- 
sertion that  our  prosperous  people  will  perjure  themselves  to 
escape  its  payment. 


Congressional  Record.  44:2209.  May   18,  1909. 
Income  Tax.     Chauncey  M.  Depew-. 

Unless,  as  in  war  times,  there  is  an  absolute  necessity  for  an 
income  tax,  it  is  the  most  direct  possible  attack  upon  the  pro- 
tective system.  The  only  way  in  which  the  surplus  revenues  it 
would  produce,  and  which  are  not  now  needed,  could  be  taken 
care  of,  would  be  either  a  horizontal  reduction  of  the  tariff  to 
bring  the  revenues  down  to  the  expenditures  or  else  to  enter 
upon  a  bacchanalian  saturnalia  of  extravagance. 

There  is  one  point  which  strikes  me  in  the  question  as  to 
whether  the  fathers  in  forming  the  Constitution  intended  that  the 
clause  providing  that  direct  taxes  should  be  apportioned  among 
the  states  according  to  population  referred  only  to  revenue  from 
land  and  not  income  from  personal  property.  The  Constitution 
was  a  compromise  between  the  large  and  populous  and  the 
small  and  sparsely  populated  states.  The  small  states  de- 
manded that  in  some  way  they  should  be  protected.  The  de- 
vice to  protect  them  was  that,  regardless  of  their  population, 
each  state  should  have  in  the  Senate  practically  two  ambas- 
sadors with  equal  vote  and  equal  power.  There  was  as  great 
disparity  then  as  there  is  now  between  the  states  of  large 
population  and  those  of  smaller  population.  The  taxing  power 
and  its  destructive  possibilities  were  thoroughly  understood. 
and  the  great  states  of  New  York,  Pennsylvania,  Virginia,  and 
Georgia  never  intended  that  they  should  be  outvoted  and  made 


26  SELECTED   ARTICLES 

to  bear  undue  burdens  because  of  the  votes  in  the  Senate  of 
the  smaller  states.  There  are  15  states  with  30  senators  in 
this  body  whose  aggregate  population  differs  only  a  few  thousand 
from  that  of  the  single  state  of  New  York  with  two  senators. 
New  York  has  one-seventh  of  the  property  of  the  country.  It 
has  one-twelfth  of  the  population.  Yet,  under  an  income  tax, 
it  would  pay  33  per  cent  of  the  burdens  of  the  Government.  It 
is  absurd  to  suppose  that  with  the  states  rights  views  that  ex- 
isted among  the  statesmen  of  the  formative  period  and  in  the 
constitutional  convention  they  ever  intended  that  any  system 
should  prevail  which  would  distribute  so  unequally  the  burdens 
of  the  Government  among  the  various  states. 

There  is  another  view  which  strikes  me  very  forcibly  and 
which  has  not  been  presented.  The  time  has  come  to  draw 
the  line  between  the  sources  of  revenue  for  the  federal  govern- 
ment and  those  which  shall  be  left  with  the  states.  The 
federal  government  has  unlimited  opportunities  for  revenue 
through  the  customs  and  by  internal-revenue  taxation  of  al- 
most limitless  varieties  and  by  other  methods.  The  states 
must  deal  directly  with  their  people.  I  was  talking  a  few  days 
since  with  the  Hon.  Edwin  A.  Merritt,  chairman  of  the  com- 
mittee on  ways  and  means  of  the  lower  house  of  the  New  York 
1^  legislature,  who  expressed  alarm  at  the  inheritance  and  income 
taxes  being  absorbed  by  the  federal  government.  The  expenses 
of  the  states,  with  the  public  improvements  which  have  become 
necessary  by  the  extraordinary  development  of  the  last  quarter 
of  a  centurj',  are  increasing  in  geometric  ratio. 

When  I  was  chairman  of  the  committee  on  ways  and  means 
in  the  lower  house  of  the  New  York  legislature,  forty-six  years 
ago,  a  tax  levy  of  $8,000,000  would  have  led  to  a  political  revo- 
lution. The  tax  levy  this  year  is  thirty-seven  millions,  and  it 
has  increased  from  twenty-two  to  thirty-seven  within  the  last 
decade.  There  was  levied  in  the  state  of  New  York  in  1907 
by  direct  taxes — that  is,  city,  village,  county,  and  town — $180,- 
942,341.27,  and  by  indirect  tax,  $32,339,707.49,  making  a  total 
of  direct  and  indirect  taxes  of  $213,282,048.76.  A  direct  tax 
for  state  purposes  has  been  abolished  in  our  state.  The  state 
government  is  carried  on  by  indirect  taxation.     This  came  be- 


INCOME  TAX  27 

cause  of  the  enormous  burdens  of  local  taxation,  amounting  to 
$181,000,000  a  year.  Our  indirect  taxation  comes  from  taxes  on 
corporations,  organization  of  corporations,  inheritances,  trans- 
fers of  stock,  traffic  in  liquor,  mortgages,  and  racing  associa- 
tions, according  to  the  following  table : 

Tax   on  corporations    $8,581,223.44 

Tax    on   organizations    of    corporations    391,423.18 

Tax    on    inheritance     5-435.394-97 

Tax   on  transfer  of   stock    5.575,986.64 

Tax   on   traffic   in   liquor    9,697,504.24 

Tax    on    mortgages     2,442,249.73 

Tax   on   racing   asssociations    215,925.29 

Total     32.339.70749 

It  is  evident  from  this  that,  with  the  budget  five  miUions 
more  than  the  amount  raised  from  these  sources  last  year,  the 
state  must  soon  find  other  sources  of  revenue.  Several  states 
have  already  adopted  an  income  tax.  No  one  would  advocate 
that  there  should  be  double  taxation  by  the  general  govern- 
ment and  by  the  states,  for  the  burden  would  be  intolerable. 
It  seems  to  me,  therefore,  that  it  is  a  fair  claim  on  behalf  of 
the  states  that  this  direct  contact  with  their  citizens  by  inherit- 
ance and  income  taxes  should  be  left  to  their  administration. 


Congressional  Record.  44:4524-5.  July  12,  1909. 

Income  Tax.   Richmond   Pearson   Hobson. 

I  believe  that  this  measure  is  a  wise  movement  in  the  direc- 
tion of  substituting  direct  taxation  for  indirect  taxation.  I 
realize  that  it  is  easier  for  governments  to  raise  money  by  indi- 
rect taxation,  and  for  that  reason  the  governments  of  the  world 
have  adopted  that  system  generally.  It  is  more  irk.some  to  col- 
lect a  direct  tax,  and  sometimes  it  seems  to  work  a  hardship 
upon  the  people  taxed ;  but  I  believe  that  a  patriotic  people  who 
control  their  own  government  are  willing  to  (>ay  the  just  taxes 
needed  for  its  support,  when  economically  administered.  -A  prime 
advantage  of  the  direct  method  is  that  the  people  know  when 


28  SELECTED   ARTICLES 

they  are  being  taxed.  To-day  I  am  sure  that  the  great  masses 
of  the  American  people  have  not  the  slightest  idea  how  many 
times  in  the  day  they  are  being  taxed  for  all  the  comforts,  con- 
veniences, and  necessities  of  life.  If  they  were  aware  of  the 
frequency,  the  magnitude,  and  scope  of  this  taxation,  they  cer- 
tainly would  not  submit  to  the  greater  part  of  it  beyond  one 
national  election.  If  the  people  were  fully  informed  on  the 
taxation  thereby  imposed,  they  would  not  submit  to  such  tarifif 
schedules  as  have  been  in  effect  for  many  years  and  such  as 
are   now  carried   by  the   present   bill. 

Another  prime  advantage  of  a  direct  tax  is  that  it  enables  a 
people  to  know  how  much  they  are  being  taxed,  and  only  when 
they  have  such  knowledge  can  they  prevent  abuse  of  the  taxing 
power.  To-day  I  do  not  believe  our  people  have  the  slightest 
idea  of  the  amount  of  taxation  that  is  levied  upon  them.  One, 
2,  3  per  cent  is  considered  a  sore  burden,  yet  to-day  our  people 
are  taxed  lo,  20,  even  30  per  cent,  and  do  not  know  it.  Still  a 
third  prime  advantage  of  a  direct  tax  is  that  we  know  where  the 
tax  goes.  In  the  present  juncture  the  bulk  of  the  taxation  of  the 
American  people  does  not  go  to  the  government  of  the  American 
people.  I  will  illustrate :  There  are  about  200,000  tons  of  pig 
iron  imported  into  the  United  States  in  a  year.  The  indirect 
tariff  tax  causes  the  government  to  get  the  impost  duty  from 
200,000  tons.  The  country  consumes  about  25,000,000  tons,  the 
price  of  all  of  which  is  raised  to  the  extent  of  the  tariff.  The 
net  result  is  that  the  pig-iron  tariff  gives  the  tax  on  200,000  tons 
to  the  government  and  the  tax  on  24,800,000  tons  to  certain 
favored  individuals,  practically  giving  over  to  individuals  the 
sovereign  right  of  taxation  that  can  only  reside  justly  in  the 
government  itself.  When  the  people  are  taxed,  they  ought  to 
know  who  gets  the  tax,  and  they  would  know  under  a  system  of 
direct  taxation.  A  fourth  prime  advantage  of  direct  taxation  is 
that  it  would  be  more  adjustable  to  the  legitimate  needs  of 
the  government,  and  it  would  tend  to  a  more  economical  and 
efficient  administration  of  the  government.  When  taxation  is 
levied  without  a  view  to  the  needs  of  government,  then  at  times 
there  is  liable  to  be  a  deficit  in  the  national  treasury,  in  which 
case  the  credit  of  the  government   may  be   shaken   and   panics 


INCOME  TAX  29 

may  result,  as  has  been  the  case  more  than  once  in  our  country's 
history. 

At  other  times  there  may  be  surplus,  a  surplus  larger  than 
necessary.  Such  a  surplus  being  injurious  to  business,  there  is 
a  tendency  on  the  part  of  the  government  to  reduce  it  by  en- 
larging expenditures,   leading  to  policies  of  extravagance. 

I  realize  that  the  expenses  of  the  government  should  natu- 
rally increase  year  by  year  with  the  growth  of  population  and 
the  work  of  government,  but  there  have  been  increases  in  the 
expenditures  of  government  in  the  last  five  or  ten  or  fifteen 
years  which  are  out  of  all  proportion  to  such  growth,  due  in 
large  measure  to  the  accumulation  of  the  surplus  under  tariff 
laws. 

I  believe,  Mr.  Speaker,  for  these  reasons  that  as  a  settled 
policy  we  should  gradually  work  toward  a  substitution  of 
direct  taxation  for  indirect  taxation  in  America.  The  result 
would  be  an  enormous  reduction  in  taxation,  to  the  great  relief 
of  our  people,  in  reducing  the  cost  of  living.  We  would  know 
when  we  were  being  taxed,  how  much  we  were  being  taxed, 
who  was  being  taxed.  The  government  would  then  get  the  tax, 
and  being  held  to  stricter  responsibility,  the  taxes  would  be 
adjusted  to  the  needs  of  government  which,  held  to  stricter  ac- 
countability would  be  more  economically  administered. 


Congressional  Record.  44:4685.  July   19,   1909. 

Income  Tax.    Edmund  H.  Hinshaw. 

When  the  railroad  rate  bill  was  passed,  much  objection  was 
made  to  the  publicity  feature  contained  therein ;  it  would  dis- 
close trade  and  business  secrets  to  rival  lines.  These  gloomy 
anticipations  were  disappointed,  and  vast  benefits  have  flowed 
from  the  publicity  of  accounts  and  methods.  It  tends  to  pre- 
vent frauds ;  it  equalizes  charges  and  prevents  discriminations. 
If  fully  enforced,  it  will  prevent  the  secret  rebate.  A  like  re- 
sult will  follow  public  disclosures  of  corporate  affairs.  The  in- 
vesting public  will  have  some  knowledge  and  some  security.     In 


30  SELECTED  ARTICLES 

a  similar  manner,  the  enforcement  of  an  income-tax  law  will 
tend  to  circumscribe  the  frauds  and  impositions  on  the  public, 
which  have  been  too  frequent  in  our  industrial  history.  As  our 
manufacturing  enterprises  become  more  firmly  established  and 
the  necessity  for  high  protective  customs  duties  becomes  less 
urgent,  the  income  tax  will  supply  the  revenues  thus  removed 
from  importations. 


Economic  Journal.  2:637-52.  December,  1892. 

Position  and  Function  of  the  Income  Tax  in  the  British  Fiscal 
System.  G.  H.  Blunden. 

The  income  tax  was  not  a  product  of  theoretical  economic  sci- 
ence. Such  support  as  it  might  be  supposed  to  have  derived 
from  the  teachings  of  Adam  Smith  would  be  referable  chiefly 
to  its  larger  measure  of  compliance  with  the  first  of  the  four 
fundamental  maxims  on  taxation  laid  down  in  the  "Wealth  of 
Nations"  than  in  the  case  of  taxes  on  commodities.  But,  altho 
Adam  Smith  placed  "equality"  first  in  order  of  the  desiderata  of 
taxation  he  by  no  means  gave  it  the  first  place  in  importance.  On 
the  contrary,  he  expressly  states  his  opinion  that  "a  very  con- 
siderable degree  of  inequality  is  not  near  so  great  an  evil  as  a 
very  small  degree  of  uncertainty."  Speaking  of  a  general  in- 
come tax,  he  says : — "A  year  seldom  passes  away,  frequently 
not  a  month,  sometimes  scarce  a  single  day,  in  which  it  (the 
profit  to  be  taxed)  does  not  rise  or  fall  more  or  less.  An  in- 
quisition into  every  man's  private  circumstances,  and  an  in- 
quisition which,  in  order  to  accommodate  the  tax  to  them,  watch- 
ed all  the  fluctuations  of  his  fortune,  would  be  a  source  of 
such  continual  and  endless  vexation  as  no  people  could  support." 
He  shows  that  such  a  tax  would  violate  the  maxim  in  which 
he  lays  it  down  that  "the  tax  which  every  individual  is  bound 
to  pay  ought  to  be  certain  and  not  arbitrary."  Uncertainty  he 
appeared  to  regard  as  the  greatest  of  evils  in  taxation,  as  ex- 
posing the  tax-payer  to  the  extortion  and  insolence  of  the  tax- 
gatherer,  and  favouring  the  corruption  of  the  officials  concerned 


INCOME  TAX  31 

in  the  levying  of  the  tax.  Ricardo  does  not  discuss  the  merits 
and  demerits  of  a  general  tax  on  property  and  income ;  but, 
incidentally,  he  lets  fall  the  observation  that  "the  burdens  of  the 
state  should  be  borne  by  all  in  proportion  to  their  means,"  and 
elsewhere  indicates  rather  loosely  that  he  uses  the  word  "means" 
in  the  sense  of  revenue  or  income.  McCulloch,  writing  soon  after 
the  revival  of  the  income  tax  by  Peel,  combats  the  view  that 
equality  of  taxation  is  of  primary  importance.  He  contends  that 
"the  salus  populi  is  in  this,  as  it  should  be  in  every  similar  mat- 
ter, the  prime  consideration ;  and  the  tax  which  is  best  fitted  to 
promote,  or  least  opposed  to,  this  great  end,  though  it  may  not 
press  quite  equally  on  the  different  orders  of  societj',  is  to  be 
preferred  to  a  more  equal  but  otherwise  less  advantageous  tax." 
He  cites  as  examples  the  taxes  on  malt  (beer),  spirits,  wine, 
and  tobacco,  which  he  considers  superior  to  any  practicable  form 
of  direct  taxation,  notwithstanding  that  the  principle  of  equality 
might  be  more  fully  embodied  in  the'  latter.  He  concludes  an 
exhaustive  review  of  the  subject  by  declaring  his  opinion  that  a 
really  equal  tax  on  property  and  income  "is  a  desideratum  which 
is  not  destined  ever  to  be  supplied."  He  rejects  the  existing  tax, 
and  will  only  allow  the  fitness  of  such  a  fiscal  expedient  for 
periods  "when  money  must  be  had  at  all  hazards ;  when  the  ordi- 
nary and  less  exceptionable  means  of  filling  the  public  coffers 
have  been  tried  and  exhausted  ;  and  when  national  independence 
must  be  secured  at  whatever  cost." 

Mill,  after  analysing  the  term  "equality  of  taxation"  and 
showing  it  to  mean  "equality  of  sacrifice,"  or  such  an  apportion- 
ment of  the  expense  of  government  as  will  cause  "each  person 
neither  more  nor  less  inconvenience  from  his  share  of  the  pay- 
ment than  every  other  person  experiences  from  his,"  describes 
this  as  a  standard  of  perfection  not  attainable'  in  practice. 

Dealing  with  the  existing  properly  and  income  tax,  he  points 
out  the  impossibility  of  obtaining  uniformly  fair  returns  from, 
or  of  accurately  estimating  the  profits  of,  traders  and  professional 
men,  and  the  inevitable  result  that  the  scrupulous  arc  taxed  to 
the  full,  whilst  the  unscrupulous  largely  escape  the  payment  of 
their  due  share.  He  sums  up  as  follows: — "It  is  to  be  feared, 
therefore,  that  the  fairness  which  belongs  to  the  principle  of  an 


32  SELECTED  ARTICLES 

income  tax  cannot  be  made  to  attach  to  it  in  practice :  and  that 
this  tax,  while  apparently  the  most  just  of  all  modes  of  raising  a 
revenue,  is  in  effect  more  unjust  than  many  others  which  are 
prima  facie  more  objectionable.  This  consideration  would  lead  us 
to  concur  in  the  opinion  which,  until  of  late,  has  usually  prevailed 
— that  direct  taxes  on  income  should  be  reserved  as  an  extra- 
ordinary resource  for  great  national  emergencies,  in  which  the 
necessity  of  a  large  additional  revenue  overrules  all  objections." 

Having  shown  that  the  income  tax  was  not  a  product  of 
theoretic  economic  science,  and  that  its  continued  existence  is 
not  due  to  any  support  derived  from  a  supposed  embodiment  of 
the  principle  of  equality,  it  will  be  well  to  explain,  somewhat  more 
minutely,  the  reasons  for  its  retention  in  spite  of  its  undoubted 
unpopularity,  and  the  causes  which  still  combine  to  make  the 
tax  obnoxious,  notwithstanding  that  repeated  efforts  have  been 
made  to  reform  it  and  to  eradicate  abuses  of  administration.  The 
great  merits  of  the  tax  are  its  productiveness  and  its  expansive- 
ness.  The  estimated  yield  for  the  present  financial  year  (1892-93) 
at  the  rate  of  sixpence  in  the  £  is  £13,400,000,  or  £2,233,000 
for  each  penny.  Large  as  this  sum  is,  the  rate  could,  upon  ade- 
quate occasion,  be  multiplied  threefold  or  even  fourfold  without 
any  great  loss  of  relative  productiveness,  and  without  the  dislo- 
cation of  any  portion  of  the  trade  or  commerce  of  the  nation. 
A  further  great  merit  in  the  tax  is  the  promptitude  with  which 
its  machinery  can  be  brought  into  operation,  the  flow  of  funds 
in  response  to  an  increase  of  the  rate  beginning  almost  at  once, 
and  the  full  addition  for  the  year  being  brought  into  account 
within  from  nine  to  fifteen  months  according  to  the  period  of  the 
year  at  which  the  increased  rate  is  decided  upon.  There  is,  also, 
an  entire  freedom  from  the  complications  which  arise  from 
changes  of  rate  in  connection  with  taxes  on  commodities,  and 
which,  besides  causing  loss  to  the  trader,  sometimes  involve  the 
allowance  of  time  for  the  disposal  of  stock  or  the  payment  of 
drawback  on  unsold  stocks.  These  are  merits  which  distinguish 
the  income  tax  above  ^11  other  taxes  as  a  fiscal  resource  for 
great  emergencies,  when,  as  Mill  observes,  the  necessity  for  an 
additional   revenue   overrules   all   objections. 

It  now  remains  to  examine  the  chief  grounds   of  objection 
to  the  income  tax  in  its  present  form. 


INCOME  TAX  .   33 

The  fact  that  widespread  evasion  is  practised  by  persons  of 
all  degrees  of  fortune  in  those  categories  where  dependence  has 
of  necessity  to  be  placed  upon  the  taxpayers'  own  returns,  is 
attested  by  the  numerous  detections  effected  every  year,  and  by 
the  "conscience-money"  remitted  by  a  remorseful  fraction  of  the 
undetected  defrauders  of  the  revenue  to  the  Chancellor  of  the 
Exchequer.  The  only  check  on  such  evasion  which  is  really 
operative  is  the  power  of  arbitrary  assessment  possessed  by  the 
commissioners  charged  with  the  thankless  duty  of  revising  the 
taxpayer's  returns.  Penalties  have  been  found  to  inspire  but  little 
respect  for  the  income  tax  law,  and  prosecutions  for  their  im- 
position are  for  various  reasons  seldom  resorted  to.  But  the 
power  of  rejecting  returns  is  one  which,  however  carefully  exer- 
cised, is  bound  to  inflict  injustice  and  hardship  in  a  large  pro- 
portion of  the  cases  to  which  it  is  applied.  Many  persons  prefer 
to  bear  the  injustice  of  an  over-assessment  rather  than  expose 
the  state  of  their  affairs.  Some  fear  damage  to  their  credit,  and 
distrust  the  secrecy  of  the  proceedings.  Others  dread  the  ordeal 
of  examination  which  they  and  their  accounts  must  undergo, 
even  in  the  prosecution  of  a  successful  appeal.  But  the  greater 
number  of  the  sufferers  do  not  keep  their  accounts  in  such  good 
order  as  would  admit  of  their  preparing  a  three-years'  summary 
at  short  notice.  Many  retail  cash  traders  of  the  smaller  sort 
keep  no  accounts  at  all ;  but,  when  smarting  under  a  sense  of  the 
injustice  of  what  they  believe  to  be,  and  what  may  be,  an  over- 
charge, their  resentment  is  rarely  subdued  by  any  consciousness 
of  blameworthiness  on  this  score.  Even  those  who  appeal  suc- 
cessfully are  frequently  and  not  unnaturally  annoyed  by  the 
unmerited  distrust  of  their  returns,  and  by  the  trouble  to  which 
they  have  been  put  to  vindicate  their  veracity.  But  so  very  in- 
vidious a  power  can  never  be  exercised  with  sufficient  freedom 
to  make  it  completely  effectual,  and  is  naturally  sparingly  applied 
to  the  returns  of  persons  and  firms  of  pood  standing  commercially 
and  socially.  Yet  these  are  sometimes  the  greatest  sinners,  and 
the  pleas  put  forward  by  them  in  extenuation  of  detected  frauds 
show  that  a  special  code  of  morality  obtains,  in  relation  to  income 
tax,  amongst  men  whose  probity  in  other  matters  is  beyond 
dispute. 


34  .  SELECTED   ARTICLES 

This  part  of  the  case  is  admirably  summarised  by  Mill,  who 
remarks  that  "the  variable  gains  of  professions,  and  still  more 
the  profits  of  business,  which  the  person  interested  cannot  always 
himself  exactly  ascertain,  can  still  less  be  estimated  with  any 
approach  to  fairness  by  a  tax-collector.  The  main  reliance  must 
always  be  placed,  and  always  has  been  placed,  on  the  returns 
made  by  the  person  himself.  No  production  of  accounts  is  of 
much  avail  except  against  the  more  flagrant  cases  of  falsehood  ; 
and  even  against  these  the  check  is  very  imperfect,  for  if  fraud 
is  intended,  false  accounts  can  generally  be  framed  which  it  will 
baffle  any  means  of  inquiry  possessed  by  the  revenue  officers 
to  detect — the  easy  resource  of  omitting  entries  on  the  credit 
side  being  often  sufficient  without  the  aid  of  fictitious  debts  or 
disbursements.  The  tax  therefore,  on  whatever  principle  of 
equality  it  may  be  imposed,  is  in  practice  unequal  in  one  of  the 
worst  ways,  falling  heaviest  on  the  most  conscientious.  The 
unscrupulous  succeed  in  evading  a  great  proportion  of  what  they 
should  pay.  Even  persons  of  integrity  in  their  ordinary  trans- 
actions are  tempted  to  palter  with  their  consciences — at  least  to 
the  extent  of  deciding  in  their  own  favour  all  points  on  which 
the  sm.allest  doubt  or  discussion  could  arise ;  while  the  strictly 
veracious  may  be  made  to  pay  more  than  the  state  intended,  by 
the  powers  of  arbitrary  assessment  necessarily  entrusted  to  the 
commissioners  as  the  last  defence  against  the  taxpayer's  power  of 
concealment." 

Turning  from  the  objections  to  the  income  tax  arising  out  of 
the  methods  of  procedure  necessarily  pursued  in  assessing  certain 
classes  of  incomes,  to  those  due  to  primary  defects  of  structure, 
we  are  at  once  confronted  with  an  old  grievance  arising  out  of 
the  imposition  of  an  equal  tax  on  temporary  and  precarious  and 
on  permanent  incomes.  Mill  allows  the  soundness  of  this  objec- 
tion, and,  whilst  recognising  the  impossiblity  of  effecting  an  ac- 
curate adjustment,  suggests  that  the  taxation  of  the  former  should 
be  one-fourth  less  heavy  than  that  of  the  latter  class,  "it  being 
thus  assumed  that  one-fourth  of  a  life-income  is,  on  the  average 
of  all  ages  and  states  of  health,  a  suitable  proportion  to  be  laid 
by  as  a  provision  for  successors  and  for  old  age."  In  pursuance 
of  this  distinction  he  divides  the  profits  of  a  trader  into  two  parts, 


INCOME  TAX  35 

one  permanent,  and  the  other  terminable  and  precarious.  A 
committee  of  the  House  of  Commons  was  appointed  in  1861,  at 
the  suggestion  of  I\Ir.  Hubbard,  who  presided  over  its  delibera- 
tions, mainly  to  investigate  the  grounds  of  this  objection,  and  to 
consider  the  best  means  of  rendering  the  tax  more  equitable. 
The  committee,  however,  reported  adversely  upon  the  proposals 
submitted  by  its  chairman,  and,  indeed,  expressed  the  opinion  that 
"the  objections  urged  against  it  (i.  e.  the  tax)  are  objections  to 
its  nature  and  essence  rather  than  to  the  particular  shape  which 
has  been  given  to  it."  They  proceeded,  in  the  next  paragraph,  to 
formulate  the  plea  which  has  since  sufficed  to  obstruct  all  efforts 
to  secure  reform  in  this  direction,  as  follows : — "Your  committee 
also  feel  that  it  would  be  unjust  to  make  any  alteration  in  the 
present  incidence  of  the  income  tax  without,  at  the  same  time, 
taking  into  consideration  the  pressure  of  other  taxation  upon  the 
various  interests  of  the  country."  This  plea  has  also  been  suc- 
cessfully used  to  obstruct  the  removal  of  the  injustice  (previously 
alluded  to)  resulting  from  the  non-allowance  of  the  cost  of  re- 
pairs and  insurance  of  property  charged  under  schedule  A,  and 
a  similar  one  in  the  case  of  the  succession  duty;  and  thus  one 
abuse  is  made  the  excuse  for  others,  and  a  vicious  circle  is  estab- 
lished. Without  suggesting  that  any  satisfactory  mode  of 
remedying  the  main  defects  of  the  income  tax  has  yet  been  de- 
vised, it  is  obviously  good  policy  from  all  points  of  view,  to 
encourage  inquiry  and  discussion  having  for  their  object  the  im- 
provement of  the  tax,  without  waiting  for  some  far-off  reform 
of  the  entire  fiscal  system. 


Economic  Journal.  4:639-67.   December,   1894. 

American  Income  Tax.     Edwin  R.  A.  Seligman. 

One  of  the  arguments  most  commonly  advanced  by  the  oppo- 
nents of  the  measure  was  the  alleged  socialistic  character  of  the 
tax.  To  assess  people  upon  their  income  was  said  to  savour 
of  socialism.  The  more  violent  enemies  of  the  measure  went  so 
far  as  to  maintain  that  the  state  has  no  right  to  confiscate  any 


36  SELECTED  ARTICLES 

part  of  a  man's  earnings  at  all.     This  objection,  indeed,  scarcely 
deserves  a   refutation,   for  it  entirely  misconceives  the   relation 
of  the  individual  to  the  state.     The  cry  of  socialism  has  always 
been  the  last  refuge  of  those  who  wish  to  clog  the  wheels  of  so- 
cial progress,  or  to  prevent  the  abolition  of  long-continued  abuses. 
The  factory  laws  were  in  their  time  dubbed  socialistic.     Com- 
pulsory education  and  the  post  office  were  called  socialistic.    And 
there  is  scarcely  a  single  direct  tax  which  has  ever  been  intro- 
duced which  has  not  somewhere  or  other  met  with  the  same  ob- 
jection.    Only  a  short  time  ago  the  new  inheritance  tax  was  ve- 
hemently opposed  in  some  of  the  American  commonwealths,  as 
was  the  new  estate  duty  in  England,  on  the  ground  of  socialism. 
The  same  fate  befell  the  property  tax  before  its  recent  intro- 
duction in  Holland  and  Germany.     As  a  matter  of  fact,  if  there 
is  any  socialism  to  be   recognized  at  all   in  these   measures,  it 
would    be    far   more   true   of    the   property   tax,   which   entirely 
exempts  all  earnings  of  the  lower  classes  in  so  far  as  they  are 
again  expended,  than  of  the  income  tax  which  reaches  earnings 
from  other  sources  than  mere  property.     The  property  tax  hits 
only  the  property  owner.     The  income  tax,  as  such,  hits  the  in- 
come receiver  whether  the  income  be  derived  from  property  or 
not.  Yet  the  Americans  have  become  so  accustomed  to  the  prop- 
erty tax  that  they  would  laugh  at  the  idea  of  its  being  called 
socialistic.     We  do  not  here  speak  of  the  exemption  feature  to 
be  discussed  below.    For  the  cry  of  socialism  was  raised  against 
the  income  tax  per  se,  while  the  high  exemption  serves  as  an 
additional  count  against  the  tax. 

Had  the  principle  of  progressive  taxation  been  introduced, 
some  colour  might  have  been  lent  to  the  accusation.  The  popu- 
lists, indeed,  introduced  several  amendments  with  this  end  in 
view ;  but  they  were  all  defeated  in  order  to  allay  possible  op- 
position. As  a  matter  of  fact,  however,  recent  investigations  have 
shown  that  progressive  taxation,  which  to  some  seems  the  very 
quintessence  of  socialism,  and  which  has  undoubtedly  often  been 
urged  for  socialistic  reasons,  is  perfectly  defensible  in  theory 
on  purely  economic  and  fiscal  grounds,  although  for  other  reasons 
its  application  to  the  income  tax  in  its  present  form  is  prac- 
tically inexpedient.    It  must  be  remembered  that  the  income  taxes 


I 


INCOME  TAX  37 

of  the  Civil  War  period  were  levied  on  the  progressive  principle, 
and  were  defended  on  purely  economic  grounds,  both  by  the  ad- 
ministration and  by  the  legislators.  England  has  not  hesitated 
to  introduce  within  the  last  few  months  a  progressive  direct 
inheritance  tax  ranging  from  one  to  eight  per  cent.  And  the 
great  extension  given  to  the  progressive  principle  in  recent  years 
in  other  countries  shows  that  the  legislators  are  not  blinded  by 
mere  words.  As  it  was,  Congress  did  not  attempt  any  gradua- 
tion of  the  tax,  except  in  so  far  as  the  $4,000  exemption  provides 
for  a  sort  of  restricted  progression.  The  cry  of  socialism  had  no 
weight. 

A  still  weaker  objection  was  the  alleged  un-American  nature 
of  the  tax.  A  prominent  senator  loved  to  expatiate  upon  the 
evils  of  monarchic  government  and  the  tyranny  of  the  effete 
civilisations  of  the  old  world.  Had  he  been  better  acquainted 
with  the  science  of  finance  tax  he  would  not  have  ventured  the 
startling  assertion  that  the  income  tax  is  unknown  in  democratic 
communities.  We  may  perhaps  assume  that  he  regards  England 
as  a  hide-bound,  mediaeval  country.  But  it  would  be  interesting 
to  ascertain  what  epithets  he  applies  to  the  cantons  of  Switzerland 
or  to  the  colonies  of  Australasia.  Of  course  it  is  a  well-estab- 
lished fact  that  the  income  tax  has  been  most  fully  developed 
precisely  in  the  most  democratic  communities.;  and  that  the  whole 
tendency  toward  democracy,  even  in  non-republican  states,  has 
gone  hand  in  hand  with  the  extension  of  direct  taxation,  and 
more  especially  of  the  income  tax.  Had  this  absurd  objection 
not  been  so  widely  quoted  and  copied,  it  would  not  deserve  men- 
tion here. 

The  third  objection  was  that  of  unconstitutionality.  The 
American  Constitution  provides  that  direct  taxes  must  be  laid  in 
proportion  to  the  representative  population  in  each  state.  This 
would  manifestly  render  it  impossible  to  levy  a  tax  on  incomes. 
For  the  number  of  people  in  the  state  does  not,  of  course,  bear 
any  necessary  relation  to  its  wealth.  An  income  tax  assessed 
according  to  the  principle  of  the  Constitution  would  give  a  de- 
cided relief  to  the  industrial  states  at  the  expense  of  the  agri- 
cultural states.  It  would  have  to  be  levied  in  a  lump  sum  upon 
each  state  according  to  population,  and  then  be  ratably  distributed 


38  SELECTED  ARTICLES 

among  the  tax-payers.  The  rate  in  one  state  would  thus  greatly 
vary  from  that  in  other  states.  If  the  income  tax  is  a  direct 
tax,  the  objection  seems  to  be  a  formidable  one. 

As  a  matter  of  fact,  however,  it  is  not  quite  so  serious.  Even 
among  economists  there  is  not  absolute  agreement  as  to  the 
exact  distinction  between  direct  and  indirect  taxes.  And  there 
is  no  doubt  that  in  discussing  the  constitutionality  of  such  a 
measure  we  must  consider  what  the  framers  of  the  Constitution 
meant  when  they  used  the  term.  |  Now,  at  the  time  the  Constitu-  i 
tion  was  discussed  there  were  no  direct  income  taxes  in  existence, 
if  we  except  the  'faculty'  tax  in  Massachusetts,  and  the  disastrous 
French  experiment  of  the  Vingtiemes,  both  of  which  were  re- 
garded rather  as  adjuncts  of  the  property  tax  than  as  distinct  i 
forms  of  taxation.  For  the  income  tax,  as  we  know,  is  a  product  / 
of  the  last  hundred  years.  The  Supreme  Court  of  the  United 
States  is  thus  undoubtedly  correct  in  assuming  that  the  only 
direct  taxes  contemplated  by  the  Constitution  were  the  poll  tax  , 
and  the  general  property  tax,  chiefly  the  land  tax.  The  question 
arose  soon  after  the  formation  of  the  government.  In  a  leading 
case  the  federal  tax  on  carriages  was  upheld  as  not  being  a  direct 
tax  within  the  purview  of  the  constitution.  Later  on,  during  the 
civil  war,  the  same  question  arose  in  regard  to  the  income  tax. 
And  here  again  the  Supreme  Court  held  in  a  number  of  cases 
that  the  income  tax  was  not  a  direct  tax  within  the  meaning  of 
the  Constitution. 

The  fifth  and  final  objection  that  has  been  urged  is  the  old 
but  ever  new  contention  that  the  income  tax,  however  wise  in 
theory,  works  badly  in  practice.  That  there  is  considerable  truth 
in  this  is  not  to"  be  denied.  But  it  is  usually  forgotten  that  in 
dealing  with  problems  of  this  character  the  real  inquiry  is  not 
what  is  absolutely  good,  but  what  is  relatively  best.  In  so  far 
as  the  objection  is  true,  it  will  be  found  to  be  due  in  great  part 
to  certain  provisions  of  the  law  which,  as  we  shall  see,  might 
have  been  avoided.  But  the  objection  itself  has  been  made  too 
much  of.  It  is  undoubtedly  true  that  the  income  taxes  in  the 
separate  states  of  the  Union,  like  Massachusetts,  Virginia,  and 
North  Carolina,  are  almost  entirely  farcical.  But  this  is  owing 
solely  to  the  fact  that  no  earnest  effort  is  made  to  execute  the 


INCOME  TAX  39 

law.  Where,  however,  there  is  a  serious  administration,  as  was 
the  case  with  the  federal  income  taxes  during  the  Civil  War,  the 
result  is  very  different.  It  is  commonly  assumed  that  the  Civil 
War  income  tax  was  in  many  respects  a  great  failure  and  was 
provocative  of  great  frauds.  But  it  has  never  occurred  to  any 
one  to  compare  the  federal  income  tax  with  the  local  property 
taxes.  I  have  undertaken  to  make  some  comparison,  and  venture 
to  say  that  the  history  of  the  federal  income  tax  shows  that, 
notwithstanding  all  its  imperfections,  crudities  and  ensuing 
frauds,  it  was  nevertheless  more  successful  than  the  general  prop- 
erty tax. 

Let  us  test  this  by  taking  its  fortunes  in  a  typical  state,  utilis- 
ing the  returns  of  the  state  comptroller  as  w-ell  as  of  the  federal 
officials. 

The  special  income  tax  of  1865  was  levied  at  the  rate  of  5  per 
cent,  on  all  incomes.  Its  yield  in  New  York  state  was  $8,765,913, 
which  corresponds  to  an  income  of  $175,318,260.  The  state  as- 
sessment for  the  general  property  tax  in  that  year  disclosed  prop- 
erty to  the  amount  of  $1,550,879,685.  That  is,  the  self-assessed 
incomes  in  New  York  amounted  to  over  11  per  cent,  of  the 
property — a  preposterously  high  figur^.  If  we  assume  that  the 
average  rate  of  profit  at  that  time  was  7  per  cent.,  the  income  on 
New  York  property  should  have  been  $108,561,578.  Yet  this  was 
not  two-thirds  of  the  income  actually  assessed.  The  income  tax 
yielded  one-third  as  much  again  as  a  corresponding  property  tax. 
Of  course  some  allowance  should  be  made  for  incomes  from 
other  sources  than  property.  But  the  exemption  of  $600  included 
almost  all  the  working  classes ;  and  the  profits  from  business  are 
practically  the  income  from  property  invested  in  the  business. 
So  that  the  only  class  for  which  an  allowance  mu.st  be  made  is 
that  of  receivers  of  professional  incomes.  The  total  income  of 
this  class  is  not  large  enough  to  make  any  material  difference  in 
the  figures  given.  The  great  success  of  the  income  tax  as  com- 
pared with  the  local  property  tax  was  due  in  part  to  the  fact  of 
the  low  valuation  of  real  estate.  But  its  main  cause  was  the  fail- 
ure of  the  state  tax  to  reach  personalty.  In  other  words  tlie  fed- 
eral income  tax  was  al)Ic  to  reach  many  of  those  who  contrived 
to  escape  the  personal  property  tax. 


J 


40  SELECTED  ARTICLES 

The  other  years  disclose  a  similar  state  of  affairs.  In  1866- 
67  the  income  tax  in  New  York  yielded  $18,448,664.  It  was 
levied  at  the  rate  of  5  per  cent,  and  10  per  cent.  Taking  this  as 
approximately  equivalent  to  a  uniform  tax  of  about  7^  per  cent., 
the  result  would  be  a  real  income  of  $245,982,187.  But  let  us 
grant,  in  order  to  weaken  the  contention  still  further,  that  it  was 
tantamount  to  a  uniform  tax  of  as  much  as  9  per  cent,  on  all  in- 
comes. That  would  mean  an  income  of  only  205  miUions.  The 
property  assessed  in  New  York  by  the  state  officials  is  returned  at 
$1,531,229,636.  Even  assuming  that  the  rate  of  income  on  capi- 
tal was  as  high  as  7  per  cent.,  we  would  have  an  income  of 
$107,186,074.  Yet  the  income  actually  returned  exceeded  this  by 
nearly  100  millions.  Even  under  the  least  favourable  showing 
incomes  appeared  as  more  than  13  per  cent,  of  property — a  figure 
manifestly  extravagant.  The  income  tax,  therefore,  produced 
almost  twice  as  much  as  the  general  property  tax.  And  even  if 
we  make  the  same  allowance  as  before  for  incomes,  derived  from 
other  sources  than  property,  the  disproportion  would  still  be 
very  considerable. 

Even  in  1870,  when  the  limit  of  exemption  had  been  increased 
so  much  as  materially  to  reduce  the  returns,  New  York  paid 
$10,420,035,  as  a  5  per  cent,  income  tax.  This  corresponds  to  a 
taxable  income  of  $208,400,700.  The  assessment  of  property  for 
the  state  tax  was  $1,967,001,185.  This  would  mean  that  incomes 
were  11  per  cent,  of  property,  which  for  that  period  is  palpably 
far  too  high. 

In  short,  the  history  of  the  income  tax  clearly  shows  that  it 
was  more  lucrative  than  a  corresponding  property  tax,  and  that 
it  succeeded  in  many  cases  where  the  personal  property  tax  failed. 
The  income  tax  was  indeed  productive  of  great  frauds,  but  the 
personal  property  tax  created  far  more.  It  was  precisely  because 
the  income  tax  reached  so  many  of  the  mercantile  and  capitalistic 
classes  who  have  both  previously  and  since  escaped  taxation  that 
it  became  unpopular  and  was  abolished. 

After  all  has  been  said,  however,  it  remains  true  that  too  much 
must  not  be  hoped  from  the  practical  working  of  the  income  tax. 
A  system  which  rests  on  a  method  of  self-assessment  manifestly 
opens  wide  the  door  to  fraud  and  evasion.     The  provision  for 


IX'COME  TAX  41 

supplementary  revision  of  the  returns  in  certain  cases  by  official 
assessments  are  far  from  adequate.  The  methods  of  checking 
the  returns  by  utilising  the  probate  courts  and  the  inventories  of 
property  after  death,  which  are  customary  in  Germany  and  even 
in  democratic  Switzerland,  would  not  be  possible  as  yet  in  Amer- 
ica. And  although  much  of  the  inquisitorial  character  of  the 
former  income  tax  has  been  removed  by  the  stringent  provisions 
in  the  new  law  calculated  to  insure  the  utmost  secrecy,  there  can 
be  very  little  doubt  that  the  effort  to  secure  correct  returns  of 
individual  incomes  will  be  far  from  successful. 

The  second  objection  is  one  to  which  attention  has  already 
been  called  in  another  connection,  viz.  the  $4,000  exemption.  It 
is  true  that  what  is  known  as  the  exemption  of  the  minimum  of 
subsistence  has  become  a  cardinal  demand  in  the  theory  of  tax- 
ation. Some  writers  have  indeed  attempted  to  prove  that  this  is 
dangerous  in  a  democracy.  It  is  wrong,  so  it  is  said,  in  a  country 
of  universal  suffrage  to  have  the  burdens  imposed  on  one  class 
and  the  expenditures  voted  by  another  class,  thus  virtually  put- 
ting the  control  of  the  public  moneys  in  the  hands  of  those,  the 
majority  of  whom  have  nothing  at  stake.  Without  entering  into 
the  general  argument  in  this  place,  it  may  be  said  that  as  a  matter 
of  fact  the  property  tax,  hitherto  almost  the  sole  reliance  of  the 
United  States  in  state  and  local  taxation,  in  itself  necessarily  in- 
cludes this  exemption  of  the  minimum  of  subsistence.  Yet  the 
particular  evil  spoken  of  has  never  made  itself  apparent.  But 
even  were  this  not  so,  the  obvious  answer  is  that  unless  the  state 
exempts  this  minimum  of  subsistence  it  must  make  good  the  dif- 
ference through  its  poor  laws.  If  it  trenches  on  the  minimum 
with  one  hand,  it  must  build  it  up  again  with  the  other. 

It  is  one  thing  however,  to  recognise  the  justice  of  the  prin- 
ciple in  the  abstract,  and  quite  another  thing  to  defend  the  par- 
ticular shape  given  to  it  by  the  new  la\V.  He  would  be  bold  in- 
deed who  would  say  that  a  $4,000  income  constitutes  a  minimum 
of  subsistence.  When  capitalised  at  the  current  rate  of  interest 
it  is  equivalent  to  a  property  of  from  $80,000  to  over  $100,000. 
This  is  not  a  minimum,  but  a  very  comfortable  subsistence.  Un- 
der the  former  income  tax  laws,  when  the  exemption  was  $600, 
the  total  number  of  taxpayers  in  1866  was  460,170.     With  an  ex- 


42  SELECTED  ARTICLES 

emption  raised  to  $i,ooo  the  number  of  taxpayers  in  1867  was 
reduced  to  240,134.  When  the  exemption  was  finally  reduced  to 
$2,000  the  total  number  of  taxpayers  in  1872  was  only  72,949. 
Even  making  allowance  for  the  increase  of  wealth,  and  popula- 
tion during  the  last  quarter  of  a  century,  it  is  manifest  that  the 
number  of  individual  taxpayers  under  the  new  law  will  be  ex- 
ceedingly small.  Regarded  from  the  standpoint  of  revenue,  Con- 
gress  has   therefore   voluntarily   abandoned  a  rich   source. 

It  must,  indeed,  not  be  forgotten  that  we  should  look  at  the 
income  tax,  not  by  itself,  but  as  a  branch  of  the  whole  revenue 
system.  Much  may  accordingly  be  said  in  mitigation  of  this 
seeming  injustice.  As  we  pointed  out  above,  the  burden  of  tax- 
ation, that  is,  of  the  tariff  and  the  local  property  tax,  is  borne 
primarily  by  the  lower  middle  class,  more  especially  by  the  farm- 
ers. Even  though  $4,000  be  not  a  minimum  of  subsistence,  it 
nevertheless  represents  in  large  part  the  income  of  a  class  which 
is  on  the  whole  unfairly  treated  at  present.  Moreover  it  must  be 
remembered  that  in  England  the  limit  of  abatement  has  recently 
been  raised  to  five  hundred  pounds,  which,  in  view  of  the  differ- 
ent purchasing  power  of  money,  is  not  much  inferior  to  the  new 
American  limit.  Nevertheless,  it  is  probably  true  that  the  limit 
has  been  fixed  too  high ;  for  already  under  the  property  tax  peo- 
ple who  earn  and  spend  their  own  incomes  are  entirely  exempt. 
In  addition,  a  definite  amount  of  property  over  and  above  the 
annual  earnings  is  also  exempt ;  so  that  the  present  law  grants 
still  another  exemption.  An  effort  was  in  fact  made  to  reduce 
the  limit  of  exemption  to  $3,000.  It  would  without  much  doubt 
have  succeeded  but  for  an  unfortunate  difference,  partly  political, 
partly  personal,  between  an  individual  senator  and  the  remaining 
members  of  the  dominant  party.  While  therefore  something  may 
be  said  in  explanation,  and  even  in  palliation,  of  the  provision, 
we  are  forced  to  the  conclusion  that  the  $4,000  exemption  is  too 
high,  and  that  it  will  seriously  interfere  not  only  with  the  fiscal 
success  of  the  measure,  but  also  with  the  popularity  of  the  tax 
among  those  who  think  that  they  are  being  unduly  burdened  in 
order  to  free  an  entire  class  that  is  well  able  to  contribute  some- 
thing. 


INCOME  TAX  43 

Economic  Journal,  11:481-91.  December,  1901. 
Theory  of  Progressive  Taxation.    G.  Cassel. 

Those  who  have  wished  to  deduce  progressive  taxation  from 
the  equal  sacrifice  principle,  have  generally  tried  to  lay  stress  on 
the  fact  that  ii  is  a  greater  sacrifice  for  a  person  who  has  an 
income  of  iioo,  than  iio  for  one  who  has  an  income  of  £1,000. 
Fully  valid  reasons  can  be  brought  forward  for  this  statement. 
If  ii  be  taken  from  a  family  which  has  an  income  of  £100,  this 
family  will  be  deprived  of  its  means  of  purchasing  very  important 
necessaries.  But  if  an  income  of  £1,000  is  diminished  by  £10, 
then  it  means  as  a  rule  only  a  sacrifice  of  very  insignificant  lux- 
uries. The  validity  of  this  reasoning  is  most  evident  if  one 
brings  into  the  comparison  an  income  which  lies  on  the  very 
margin  of  what  is  absolutely  necessary  for  subsistence.  A  tax 
of  I  per  cent,  is  for  such  an  income  not  only  very  much  heavier 
than  a  corresponding  tax  on  a  larger  income,  but  the  sacrifices 
which  are  necessary  in  such  a  case  are,  as  Mill  says,  quite  in- 
commensurable. Like  Bentham,  Mill  derives  from  this  the  ne- 
cessity of  a  tax-free  minimum  of  subsistence,  and  with  quite 
logical  consistency,  he  concludes  that  this  minimum  shall  be  de- 
ducted from  all  incomes,  so  that  only  those  sums  are  to  be  taxed 
by  which  the  different  incomes  exceed  the  minimum  of  subsist- 
ence. It  is  curious  that  political  economists  have  not  yet  been 
able  to  agree  about  a  thing  which  seems  so  evident  from  a  logical 
point  of  view,  and  which  would  besides  afford  such  great  facilities 
from  a  purely  technical  aspect. 

Mill  refuses  to  make  any  further  concessions  to  the  defenders 
of  the  progressive  taxation.  That  a  tax  of  the  same  percentage 
for  large  and  small  incomes  (the  existence-minimum  having  been 
deducted  from  all  of  them)  would  cause  the  lower  incomes  a 
greater  sacrifice,  seems  to  Mill  "too  disputable  altogether,  and 
even  if  true  at  all,  not  true  to  a  sufficient  extent,  to  be  made  the 
foundation  of  any  rule  of  taxation."  And,  in  fact,  these  ques- 
tions, as  they  are  generally  brought  forward,  are  certainly  too 
indefinite  to  serve  as  the  foundation  of  any  scientific  discussion. 

But  it  seems  to  me  that  the  analysis  can  be  carried  out  in  a 


44  SELECTED   ARTICLES 

more  profound  and  consistent  manner  on  the  line  that  Mill  has 
indicated.  The  reason  for  making  a  deduction  is  that  a  tax  which 
interferes  with  the  necessaries  of  some  classes  of  society  cannot 
fulfil  the  conditions  of  "the  equal  sacrifice."  But  it  is  quite  im- 
possible to  state  any  fixed  sum  which  would  always  correspond 
to  these  necessaries.  On  the  contrary  it  is  certain  that  the  neces- 
saries of  life  of  the  higher  classes  of  society  are  on  the  average 
considerably  greater  than  those  of  the  lower  classes.  If  one  once 
grants  that  a  tax  which  is  to  produce  an  equal  sacrifice  must  not 
take  away  any  of  those  means  which  are  needed  to  cover  essen- 
tial wants,  then  for  the  sake  of  consistency  the  deductions  must 
be  made  greater  for  the  higher  classes  of  society.  It  is  simply 
impossible  for  a  professional  man  to  live  as  cheaply  as  a  com- 
mon miner.  He  has  outlays  for  books,  paper  and  correspondence, 
and  if  he  has  a  family  he  cannot  live  and  work  in  only  one  room. 
He  cannot,  in  one  word,  discharge  his  function  in  society,  and, 
economically  speaking,  continue  to  exist  as  the  same  person,  if  he 
is  reduced  to  a  standard  that  can  be  considered  as  a  fair  minimum 
for  a  common  labourer.  Such  a  reduction  means,  therefore,  to 
him  a  sacrifice  of  much  the  same  nature  as  that  of  the  labourer 
deprived  of  a  certain  part  of  the  necessities  for  physical  existence. 
Then  the  professional  man,  deprived  of  the  possibility  of  carry- 
ing on  his  profession,  will  probably  not  be  able  to  earn  anything 
in  a  lower  grade  of  work.  For  some  expenses  of  the  kind  men- 
tioned above  tax-legislation  can  grant  direct  deduction ;  as,  for 
instance,  for  an  artisan's  shop-rent  or  other  business  expenses. 
But  a  number  of  expenses  remain,  nevertheless,  which  are  so 
nearly  connected  with  the  personal  consumption  of  the  taxpayer, 
that  there  can  be  no  question  of  deducting  them  as  expenses. 
There  is  thus  no  other  course  open  than  to  confess  the  simple 
truth,  that  the  necessaries  of  life  are  actually,  in  the  present  state 
of  society,  more  numerous  for  the  higher  classes.  To  make  this 
statement  more  definite  we  can  say  that  the  income  which  is  nec- 
essary for  a  person's  economical  existence  increases  on  an  aver- 
age with  the  total  real  income,  but  naturally  more  slowly  than 
this.  In  fact  there  would  probably  be  no  one,  of  whatever  class 
or  party,  who  would  deny  this  truth  if  he  were  to  judge  it  by  it- 
self.    But  if  that  is  the  case  one  could  expect  that  it  would  be 


INCOME  TAX  45 

recognized  also  in  the  theory  of  taxation,  quite  independently  of 
the  consequences  to  which  it  might  lead. 

We  are,  however,  not  yet  so  free  from  prejudice.  The  rea- 
son why  most  people  are  unwilling  to  grant  tax-free  deductions 
to  the  higher  incomes,  is  probably  the  widely  spread  belief  that 
the  higher  classes  would  necessarily  be  specially  favoured  thereby. 
But  a  closer  examination  proves  that  this  supposition  is  quite 
false.  If  the  untaxed  deduction  increases  more  slowly  than  the 
income,  then  clearly  the  remainder  increases  more  rapidly  than 
the  income.  A  proportional  tax  levied  on  the  remainder  is  then 
a  progressive  tax  on  the  total  income.  Moreover,  as  we  shall  see 
presently,  it  is  possible,  by  allowing  such  deductions  and  taxing 
the  remainders  at  a  constant  rate,  to  obtain  as  strong  a  progres- 
sion as  we  please. 

To  recapitulate:  The  principle  of  equal  sacrifice  leads  us  to 
deduct  from  all  incomes  certain  necessaries  and  to  tax  the  re- 
mainders at  a  constant  percentage.  These  necessaries  are  not  the 
necessaries  of  merely  physical  subsistence ;  but  are,  to  use  the 
language  of  Prof.  Marshall,  "the  necessaries  of  eMciency."  Then 
as  soon  as  taxation  would  interfere  with  the  efficiency  of  any 
special  class  of  the  community,  the  sacrifice  of  this  class  would 
be,  in  Mill's  terms,  quite  incommensurable  with  that  of  the  other 
classes,  taxed  only  out  of  their  surplus  income  above  the  margin 
of  efficiency.  Thus  "equal  sacrifice"  means  deduction  of  the  nec- 
essaries of  efficiency  and  a  proportional  tax  on  the  remainders. 

The  question  how  to  construct  an  income-tax,  meant  to  pro- 
duce an  equal  sacrifice,  is  thus  reduced  to  the  problem :  What 
are  the  average  necessaries  of  efficiency  in  the  dififerent  grades  of 
income?  We  know  already  that  these  necessaries  increase  with 
the  incomes,  but  more  slowly,  and,  consequently,  that  we,  by  de- 
ducting them  and  taxing  the  remainders  at  a  uniform  rate,  will 
arrive  at  a  progressive  tax. 

Fortnightly  Review.  87:807-17.  May,  1907. 
Income  Tax.     Benjamin  Taylor. 

The  broad  argument  in  favour  of  graduation  is  that  it  is  a 
desirable  and  convenient  method  of  reducing  in  some  degree  the 


46  SELECTED   ARTICLES 

Inequalities  'of  wealth.  Equality  of  sacrifice  is  the  proper  eco- 
nomic basis  of  taxation,  but  that  is  not  to  be  measured  by  equality 
of  contribution.  It  is  contended  that  at  present  large  incomes 
pay  less  in  proportion  in  taxation  than  do  small  incomes,  but  this 
argument  overlooks  the  incidence  of  the  death  duties.  If  the 
burden  of  indirect  taxation  does,  as  is  alleged,  fall  more  heavily 
upon  the  poorer  man  in  proportion  to  his  income,  then  it  is  just 
that  he  should  have  some  relief  in  the  burden  of  direct  taxation. 
If  the  income  tax  is  no  longer  to  be  regarded  as  an  emergency 
tax,  but  as  a  permanent  tax  (which  it  has  pratically  become, 
and  which  the  select  committee  assume  it  to  be),  then  the  ques- 
tion of  graduation  attains  a  form  and  importance  that  it  has  not 
had  in  the  past.  It  is  now  a  new  principle  in  our  system  of  taxa- 
tion. We  have  it  in  the  house  duty  and  in  the  death  duties ;  we 
have  it,  indeed,  already  in  the  income  tax,  in  the  form  of  exemp- 
tions and  abatements.  We  graduate  when  we  exempt  all  incomes 
below  ii6o.  We  graduate  when  we  allow  abatements  on  all  in- 
comes between  £i6o  and  £700.  There  should  be  no  exemption 
above  a  line  necessary  to  cover  the  bare  cost  of  living,  and  £160 
is  too  high  for  that.  And  if  it  is  right  to  discriminate  on  incomes 
under  £700,  it  is  also  right  to  discriminate  on  incomes  above  that 
figure.  But  if  there  were  no  exemptions  and  no  abatements  there 
need  be  no  discrimination,  for  the  total  yield  would  be  increased 
from  a  greatly  reduced  rate  per  pound. 

According  to  the  special  report  from  the  British  embassy  on 
the  income  tax  system  in  Prussia,  under  the  present  law,  all  per- 
sons with  incomes  of  over  £150  a  year  have  to  send  in  an  annual 
declaration  of  their  full  income,  divided  according  to  the  four 
main  sources — capital,  landed  property,  trade  and  industrial  em- 
ployment bringing  gain.  This  includes  the  salaries  or  wages  of 
workmen,  servants  and  industrial  assistants,  military  persons  and 
officials ;  also  the  receipts  of  authors,  artists,  scientists,  teachers 
and  tutors.  One  of  the  main  principles  underlying  the  Prussian 
income  tax  law  is  the  taxation  according  to  capacity,  and  for 
this  purpose  a  regular  system  of  progressive  taxation  has  been 
adopted.  The  normal  rate  is  3  per  cent,  of  the  income,  but  falls 
for  incomes  under  £500,  and  rises  for  incomes  over  £1,500,  up  to 
4  per  cent,  for  those  over  £5,000.    Persons  liable  to  taxation,  with 


INCOME  TAX  47 

an  income  of  not  more  than  £150.  may  deduct  from  that  income 
£2  IDS.  for  every  member  of  their  family  under  fourteen  years  of 
age  who  is  not  assessed  independently.  If  three  or  more  such 
members  exist  in  a  family,  an  abatement  by  at  least  one  stage  of 
the  scale  of  taxation  is  allowed.  As  taxation  only  begins  with  an 
income  of  £45,  a  man  with  an  income  of,  say  £49,  who  has  two 
children  under  fourteen  years  of  age  would  be  exempt.  As  a 
result  of  this  provision,  in  1899,  out  of  2,701,209  persons  assessed 
at  incomes  up  to  £150,  240,103  were  exempted  entirely,  and  more 
than  a  third  paid  a  lower  rate.  Abatement  is  allowed  to  taxpay- 
ers with  incomes  up  to  £475  whose  solvency  has  been  unfavour- 
ably affected  by  adverse  economic  circumstances. 

In  1903  (the  latest  year  covered  by  the  report)  the  total  yield 
of  income  tax  in  Prussia  was  £8,569,402  from  3,895,184  individu- 
als. Of  that  total  £2,531,399  was  contributed  by  taxpayers  whose 
incomes  were  between  £45  and  £150,  incomes  which  are  wholly 
exempt  in  this  country.  The  taxation  worked  out  at  14s.  8d.  per 
taxpayer,  or  is.  5d.  per  head  of  population,  on  incomes  under 
£150  and  £13  per  taxpayer,  or  3s.  5d.  per  head  of  population  on 
incomes  over  £150. 

Besides  income  from  interest  and  dividends  from  investments, 
income  from  landed  property,  income  from  trade  and  industry, 
inclusive  of  mining,  the  tax  is  levied  on  income  from  occupa- 
tions bringing  profit  and  from  rights  to  periodical  allowances, 
&c.  Income  from  occupations  bringing  profit,  as  also  from  rights 
to  periodical  allowances  and  benefits  of  all  kinds,  includes  the 
earnings  of  workmen,  servants,  and  industrial  assistants,  the  sal- 
aries of  military  persons  and  officials  of  every  kind  ;  the  profits 
from  literary,  artistic,  scientific,  teaching,  or  educational  work, 
also  half-pay  pensions,  and  other  continuous  receipts  which  can 
not  be  regarded  as  the  annual  proceeds  of  movable  or  immovable 
property;  and  such  receipts  as  are  attached  to  the  person  of  their 
receiver.  The  income  from  official  apartments  is  assessed  accord- 
ing to  the  local  renting  value,  but  not  higher  than  15  per  cent, 
of  the  actual  salary  of  the  person  entitled  to  them.  In  the  case 
of  military  persons,  imperial  officials,  state  officials,  clergymen, 
and  teachers,  that  i)art  of  their  official  income  which  is  intended 
to  meet  their  official  expenses  is  exempted. 


48 


SELECTED   ARTICLES 


The  following  are  the  Prussian  rates  of  taxation. 
tax  amounts  annually,  in  cases  of  income  of : — 


The  income 


More 
than 

Up  to 
inclu- 
sivley 

To 

More 
than 

Up  to 
inclus- 
ively 

£  s. 

To 

£  s. 

£  s. 

£  s. 

£  s. 

£  s. 

45  0 

52  10 

6 

195  0 

210  0 

4  12 

52  10 

60  0 

9 

210  0 

225  0 

5  4 

60  0 

67  10 

12 

225  0 

250  0 

5  18 

67  10 

75  0 

16 

250  0 

275  0 

6  12 

75  0 

82  10 

1  1 

275  0 

300  0 

7  6 

82  10 

90  0 

1  6 

300  0 

325  0 

8  0 

90  0 

105  0 

1  11 

325  0 

350  0 

8  16 

105  0 

120  0 

1  16 

350  0 

375  0 

9  12 

120  0 

135  0 

2  4 

375  0 

400  0 

10  12 

135  0 

150  0 

2  12 

400  0 

425  0 

11  12 

150  0 

165  0 

3  0 

425  0 

450  0 

12  12 

165  0 

180  0 

3  10 

450  0 

475  0 

13  16 

180  0 

195  0 

4  0 

475  0 

525  0 

15  0 

It  rises  in  the  case  of  incomes  of: — 


More 
than 

Up  to 

inclus- 
ively 

£ 

For  every 

By 

£ 

£ 

£  s. 

525 

1.525 

50 

1  10 

1,525 

1,600 

75 

3   0 

1,600 

3,900 

100 

4   0 

3,900 

5,000 

100 

5   0 

In  cases  of  incomes  of  more  than  is.ooo  up  to  £5,250  the  tax 
amounts  to  £200,  and  rises  in  cases  of  still  higher  incomes  of  £10 
for  every  £250.  For  every  member  of  a  family  under  fourteen 
years  of  age,  whose  income  is  not  to  be  assessed  independently, 
the  sum  of  ii  ids.  is  to  be  deducted  from  the  taxable  income  of 
the  head  of  the  family,  if  this  does  not  exceed  £150,  and  in  the 
event  of  three  or  more  such  members  of  a  family  existing,  an 
abatement  by  at  least  one  stage  of  the  scale  is  to  be  allowed.  At 
the  assessment  it  is  permissible  to  consider  special  economical 
circumstances  prejudicing  the  solvency  of  the  taxpayer  in  such  a 


INCOME  TAX  49 

manner  that  in  cases  of  incomes  not  exceeding  £475  an  abate- 
ment of  the  rates  is  allowed.  As  circumstances  of  this  nature, 
extraordinary  obligations  on  account  of  maintaining  and  educat- 
ing children,  maintaining  poor  relations,  continuous  illness,  debts, 
and   special  misfortune   only  may  be  considered. 

In  Saxony  a  graduated  income  tax  is  levied  on  all  incomes  of 
£20  a  year  and  upwards.  Fixed  salaries  and  wages  are  taxed  on 
the  amount  being  earned  at  the  date  of  making  the  return,  though, 
should  an  advance  be  received  betw'een  that  date  and  the  date 
of  closing  of  the  register  (in  December)  a  supplementary  declar- 
ation of  that  advance  is  necessary.  Where  a  fixed  wage  is  sup- 
plemented by  a  bonus  it  is  necessary  to  return  the  sum  actually 
received  in  this  way  during  the  past  year.  Where  a  fixed  wage- 
earner  has  extraneous  sources  of  income,  as,  for  example,  an 
official  by  doing  some  copying  work,  or  giving  private  writing  or 
drawing  lessons,  he  has  to  take  into  account  not  only  what  he  has 
received  during  the  past  but  what  he  may  expect  to  receive  dur- 
ing the  coming  year.  The  income  of  a  domestic  servant  is  con- 
sidered to  'consist  not  only  of  his  or  her  wages,  but  also  of  what 
it  is  estimated  that  his  or  her  board  and  lodging  are  worth. 
Waiters  and  tramway  conductors,  who  are  accustomed  to  receive 
gratuities,  have  to  submit  an  estimate  of  what  these  may  bring  in 
during  the  year.  Even  free  seats  alloted  in  theaters  and  concert 
halls  to  dramatic  and  musical  critics  are  held  to  constitute  a  basis 
of  taxable  income,  as  affording  "free  amusement,"  for  which 
allowance  would  otherwise  have  to  be  made. 

In  the  Duchy  of  Baden,  with  regard  to  earned  and  unearned 
incomes,  no  difference  is  made  in  the  income  tax  itself;  but  un- 
earned incomes  (those  derived  from  dividends,  rents,  &c.)  are 
more  heavily  weighted  than  earned  incomes  (those  from  personal 
exertion),  in  that  there  exist  in  the  Grand  Duchy  various  taxes, 
such  as  a  tax  on  invested  capital  which  is  analogous  to  an  Erg'dn- 
zugssteuer,  and  land,  house,  and  industry  taxes,  which  do  not 
affect  the  latter  class  of  incomes  while  weighing  on  the  former. 
In  certain  instances  the  tax  is  levied  at  the  source,  i.  e.,  on  the 
salaries  before  they  arc  paid.  This  is  the  case  with  minor  state 
officials  and  the  workpeople  of  large  contractors,  who  arc  bound 
under  their  own  recognisances  to  pay  the  income  tax  on  the 
wages  of  their  employees. 


50  SELECTED  ARTICLES 

The  system  of  graduation  in  Holland  may  be  thus  summarised 
from  the  report  published  by  the  f oregin  office  in  1905 : — The 
property  tax,  though  meant  as  part  of  an  income  tax,  is  calculated 
not  from  the  income  itself,  but  from  the  property,  the  fiction 
being  adopted  that  the  normal  yield  of  income  out  of  property  is 
4  per  cent.  The  rate  of  the  tax  is  1.25  florins  for  every  1,000 
florins  of  property  after  deduction  of  10,000  florins.  If,  how- 
ever, the  whole  estate  exceeds  200,000  florins,  the  excess  is  taxed 
at  the  rate  of  two  florins  for  every  1,000  florins.  (The  sum  of 
237.5  florins  mentioned  in  the  report  as  the  tax  on  200,000  florins 
is  thus  arrived  at :  200,000  florins  abated  10,000  florins,  or  190,000 
florins  net,  at  1.25  per  1,000=237.5  florins.)  There  are,  in  the 
case  of  small  properties,  some  deviations  from  the  strict  applica- 
tion of  the  rule.  Exemption  reaches  to  13,000  florins  instead  of 
10,000  florins,  and  the  tax  on  13,000  florins  and  14,000  florins  is 
slightly  decreased,  but  from  15,000  florins  onwards  the  system  is 
applied  without  variation.  The  professional  income  tax  is  two 
florins  for  every  100  florins  after  deduction  of  800  florins.  If, 
however,  the  income  exceeds  8,200  florins,  the  excess  is  taxed  at 
the  rate  of  3.2  florins  for  every  100  florins.  For  incomes  below 
1,500  florins  there  is  a  deviation  from  this  principle,  the  lowest 
income  taxed  being  650  florins  which  pays  one  florin  (whereas 
properly  850  florins  should  pay  one  florin),  and  all  incomes  be- 
tween 650  florins  and  1,500  florins  pay  somewhat  more  than  the 
sum  to  which  they  would  be  liable  under  the  strict  application  of 
the  rule.  Incomes  above  1,500  florins  are  taxed  according  to  the 
rule  without  variation.  A  special  arrangement  is  made  for  vested 
incomes  derived  in  part  from  property  and  in  part  from  labour. 
Thus,  if  the  estate  exceeds  200,000  florins  in  value  the  whole  in- 
come out  of  labour  is  taxed  at  the  highest  rate,  3.2  per  cent.,  after 
deduction  of  200  florins  only;  if  the  estate  is  less  than  200,000 
florins  the  income  out  of  labour,  after  deduction  of  400  florins, 
is  taxed  at  2  per  cent,  in  so  far  as,  added  to  the  income  out  of 
property  (at  4  per  cent.),  it  does  not  exceed  8,200  florins,  the 
excess  above  8,200  florins  being  taxed  at  2i-2  per  cent.  In  these 
cases  also  there  are  some  minor  deviations  from  the  strict  pro- 
gression affecting  cases  where  the  income  (both  from  property 
and  labour)  is  small. 


INCOME  TAX  51 

Forum.   17:1-13.  March,   1894. 
Income  Tax:  Is  It  Desirable?    David  Ames  Wells. 

An  income  tax  is  the  verj^  essence  of  personal  taxation.  Not- 
withstanding the  decision  of  the  Supreme  Court  of  the  United 
States  that  it  is  not  a  direct  tax,  it  comes  to  the  taxpayer  most 
directlj^;  and  this  is  the  first  reason  why  human  nature  does  not 
like  it.  The  world's  experience  is  to  the  same  effect  in  respect  to 
a  "poll"  or  "head"  tax.  This  is  acknowledged  to  be  a  direct  tax, 
and  altogether  personal  in  its  incidence.  It  has  accordingly  al- 
ways been  most  unpopular.  Its  collection  has  been  the  occasion 
of  great  civil  disturbances  in  the  world's  history,  and  it  has  been 
denied  a  place,  by  popular  vote  or  constitutional  provision,  in  the 
tax  system  of  twenty  states  of  the  federal  union. 

A  second  and  more  important  reason  why  a  general  income 
tax  powerfully  antagonizes  popular  sentiment  is,  that  its  efficient 
administration,  or  revenue  productiveness,  requires  that  every 
person  liable  to  taxation  in  respect  to  his  annual  net  gains,  profits, 
or  income  shall  make  a  government  official  an  exhibit  of  the  fi- 
nancial condition  of  his  estate,  business,  or  profession ;  for,  in 
default  of  such  an  exhibit,  any  basis  for  assessment  must  be  a 
mere  matter  of  conjecture  on  the  part  of  the  assessor,  with  a  re- 
sult devoid  of  any  pretence  to  correctness  or  equality.  But  such 
an  exhibit,  necessarily  disclosing  to  a  greater  or  less  degree  his 
financial  condition  to  his  business  competitors  and  to  a  curious, 
gossiping  public,  no  man  will  willingly  make ;  and  he  naturally 
regards  it  as  in  the  nature  of  an  outrage  on  the  part  of  a  govern- 
ment that  seeks  to  compel  him  to  do  it.  Hence  the  successful  ad- 
ministration of  an  income  tax  involves  and  requires  the  use  of 
arbitrary  and  inquisitorial  methods  and  agencies  which,  perfectly 
consistent  with  a  despotism,  are  entirely  antagonistic  to  and  in- 
compatible with  the  principles  and  maintenance  of  a  free  gov- 
ernment. 

In  support  of  this  assertion  attention  is  asked  to  the  following 
historical  evidence.  It  is  well  known  that  one  of  the  principal 
causes  which  led  to  the  great  French  Revolution  was  the  inequal- 
ity  (class-exemptions)   and  nuiltiplicity  of  taxes,  and  one  of  the 


52  SELECTED   ARTICLES 

first  acts  of  the  national  assembly  of  1789  was  to  repeal  all  in- 
quisitorial and  arbitrary  taxes  of  every  name  and  character;  and 
this  repeal  was  based  on  the  report  of  a  committee  composed  of 
some  of  the  most  eminent  members  of  the  convention, — La 
Rochefoucauld  and  Talleyrand  being  of  the  number, — which  com- 
menced with  the  following  proposition :  "Every  system  of  taxa- 
tion which  necessitates  personal  and  arbitrary  inquisitions  for  its 
execution  is  inconsistent  with  the  maintenance  of  a  free  people." 
And  from  that  day  to  this,  France  has  never  sanctioned  any  sys- 
tem of  taxation  inconsistent  with  this  principle,  although  at  the 
present  time,  by  reason  of  a  national  debt  greater  than  was  ever 
borne  by  any  other  nation,  the  government  of  France  has  felt 
compelled  to  resort  to  almost  every  other  method  for  obtaining 
revenue. 

Again,  Alexander  Hamilton,  who  was  a  member  of  the  con- 
ventions that  framed  the  constitution  of  the  United  States,  as 
well  as  the  first  constitution  of  the  state  of  New  York,  in  dis- 
cussing this  subject  (in  the  "Constitutionalist"),  also  expressed 
himself   as   follows: 

"The  genius  of  liberty  reprobates  everytliing  arbitrary  or  dis- 
cretionary in  taxation.  It  exacts  tliat  every  man,  by  a  definite 
and  general  rule,  should  know  what  proportion  of  his  property  the 
state  demands.  Whatever  liberty  we  now  boast  in  theory,  it  can- 
not exist  in  fact  while  (arbitrary)   assessments  continue." 

The  United   States   Supreme   Court,  in  the  case  of  Boyd  v. 

United  States  (116  U.  S.  Rep.,  631,  632),  has  also  expressed  itself 

as    follows : 

"Any  compulsory  discovery,  by  extorting  the  party's  oath  or 
compelling  the  production  of  his  private  books  and  papers  to  con- 
vict him  of  a  crime  or  to  forfeit  his  property,  is  contrary  to  the 
principles  of  a  free  government.  It  is  abhorrent  to  the  instincts  of 
an  Englishman.  It  is  abhorrent  to  the  instincts  of  an  American. 
It  may  suit  the  purposes  of  despotic  power,  but  it  cannot  abide  the 
pure  atmosphere  of  political  liberty  and  personal  freedom." 

So  much  for  what  may  be  termed  the  philosophy  of  an  income 
tax.  Consideration  of  some  of  its  most  instructive  experiences 
is   next   in   order. 

The  old  Romans,  who  never  gave  much  place  to  sentiment  in 
their  laws  or  policy,  had  an  income  tax  in  the  earlier  days  of  the 
Empire,  and  they  overcame  all  difificulties  connected  with  its  ad- 
ministration in  the  following  manner.  They  authorized  their  tax 
officials,  in  cases  where  the  citizen  did  not  in  their  opinion  make 


I 


INCOME  TAX  S3 

a  satisfactory  payment,  or  was  suspected  of  false  statements  in 
respect  to  his  income  or  property,  to  administer  torture ;  and  the 
historian  Gibbon,  in  writing  about  this  feature  of  Roman  history, 
justifies  it  in  a  measure  in  the  following  language : 

"The  secret  wealth  of  commerce,  and  the  precarious  profits  of 
art  and  labor,  are  susceptible  only  of  a  discretionary  valuation; 
and  as  the  person  of  the  trader  supplies  the  want  of  a  visible  and 
permanent  security,  the  payment  of  the  imposition,  which  in  the 
case  of  a  land  tax  may  be  obtained  by  the  seizure  of  property,  can 
rarely  be  extorted  by  any  other  means  than  corporeal  punishment." 

That  the  Roman   income-tax   system   was   successful   as   respects 

revenue,  is  probable ;  but  it  was  also  destructive  of  the  state : 

for  the  testimony  of  history  is  that  its  people  finall}^  welcomed 

the  inroad  of  the  barbarians  as  a  lesser  evil  than  the  corltinuance 

of  their  tax  system. 

As  has  been  already  intimated,  there  has  been  nothing  corre- 
sponding to  a  general  income  tax,  with  personal  inquisitorial  fea- 
tures, in  the  fiscal  system  of  France,  since  the  Revolution  of 
1789.  In  place  of  it,  taxes  are  levied  on  the  indicia  or  signs 
which  each  citizen  presents  of  his  possession  of  income  or  per- 
sonal property:  and  the  rents  or  rental  value  of  the  premises  he 
occupies  for  residence  or  business,  and  the  doors  and  windows  of 
buildings,  are  regarded  as  such  signs  or  indicia.  A  tax  of  three 
per  cent  is  levied  on  the  interest  and  dividends  of  certain  securi- 
ties, shares  and  bonds  issued  by  departments,  companies,  and  in- 
dustrial establishments  ;  but  its  administration  is  not  direct  and 
does  not  affect  associations  of  partnership,  nor  private  obligations 
or  mortgages. 

Russia,  some  time  since,  also  abandoned  the  idea  of  an  income 
tax,  and  is  reported  to  have  substituted  a  tax  upon  the  rental  of 
occupied  houses,  with  certain  exemptions,  to  be  paid  by  the 
tenant. 

The  only  one  of  the  great  governments  of  the  world  at  the 
present  time  which  can  prefer  a  claim  to  a  large  measure  of  suc- 
cess in  administering  an  income  tax  is  that  of  Germany,  and 
especially  that  of  the  Kingdom  of  Prussia.  And  the  methods  by 
which  such  success  has  been  attained,  and  which  seem  to  be  based 
on  the  precedents  established  by  the  old  Romans  so  far  as  the 
changed  conditions  of  civilization  will  permit,  ought  to  be  most 
instructive  tf)  those  who  think  this  tax  can  be  officially  adminis- 


54  SELECTED  ARTICLES 

tered  and  made  notably  productive  of  revenue  in  the  United 
States.  The  tax  in  Germany  is  levied  as  it  were  in  duplicate,  or 
under  two  forms :  first,  by  towns  and  cities,  and  termed  "com- 
munal" ;  and  second,  by  the  state,  under  the  designation  of  "class" 
tax.  An  entire  exemption  from  these  taxes  is  granted  only  to  the 
very  poorest  and  humblest  of  the  population. 

"Petty  hucksters  with  a  small  stock  of  potatoes,  second-hand 
clothes  peddlers,  servant-girls  earning  $4.25  a  quarter,  pay  the 
communal  tax,  and  are  also  inscribed  in  the  first  (or  lowest)  grade 
of  the  class  tax." 

Every  foreigner  staying  in  Prussia  more  than  one  year,  but 
with  no  intent  of  becoming  a  permanent  resident,  must  expect  to 
be  taxed  on  his  income  at  the  expiration  of  the  first  year,  al- 
though none  of  the  sources  of  such  income  may  be  within  the 
territorial  jurisdiction  of  Prussia.  Up  to  the  year  1891-92  the 
income  tax  of  Prussia  was  levied  by  a  board  of  income  tax  com- 
missioners, one-third  of  whom  were  appointed  by  the  authorities, 
and  two-thirds  by  the  taxpayers.  The  assessing  was  done  by  the 
board  on  information  and  evidence  obtainable  and  in  the  absence 
of  authentic  proof  as  to  the  amount  of  annual  income,  "circum- 
stantial and  hypothetical  evidence  was  accepted."  Parties  thus 
assessed  might  appeal  from  the  conclusions  of  the  board  to  an- 
other tribunal  organized  for  that  purpose,  whose  decision  was 
final.  Appeals  are  not  often  made  to  this  latter  board,  as  the 
methods  adopted  by  it  to  bring  unwilling  or  evasive  taxpayers  to 
terms  are  harsh  and  inquisitorial  in  the  extreme,  and  most  per- 
emptory. The  modus  procedendi  against  delinquent  taxpayers  is 
very  summary.  If,  after  three  days'  written  notice,  payment  fails 
to  be  made,  a  mandate  is  issued  by  the  tax-collector,  and  the 
property  of  the  delinquent,  especially  his  household  goods,  is 
seized  and  sold.  By  another  curious  provision  in  the  German 
tax  law,  the  collector  of  taxes  is  made  personally  liable  for  any 
taxes  lost  by  reason  of  his  failing  mercilessly  to  enforce  the  col- 
lection within  a  prescribed  period.  In  1891  some  mitigation  of 
the  harsh  proceedings  involved  in  the  assessment  of  the  income 
tax  in  Prussia  was  made  by  the  government,  and  now  every  tax- 
payer is  allowed  to  make  a  return. 

The  idea  of  a  general  income  tax  as  a  means  of  raising  rev- 
enue was  first  embodied  in  the  form  of  a  statute  in  Great  Britain 


INCOME  TAX  55 

under  the  administration  of  IMr.  Pitt  in  1798;  and  was  proposed 
and  advocated  solely  as  a  means  for  obtaining  additional  revenue 
for  the  prosecution  of  the  war  with  France.  It  imposed  a  tax  of 
ten  per  cent  on  all  incomes  in  excess  of  i200  ($1,000).  After  the 
Peace  of  Amiens,  in  1802,  it  was  repealed  on  the  ground  that  a 
tax  of  this  character  ought  to  be  exclusively  reserved  for  the 
exigencies  of  war ;  and  for  the  same  reason  it  was  reimposed 
on  a  revival  of  the  war  during  the  following  year.  Subject  to 
various  modifications  it  formed  an  important  constituent  of  the 
fiscal  system  of  Great  Britain  until  after  the  battle  of  Waterloo 
and  the  Peace  of  1815,  when  it  was  again  repealed.  After  this, 
nothing  more  was  heard  about  it  until  1842,  when  Sir  Robert  Peel 
reimposed  it  as  a  merely  temporary  measure, — /.  e.  for  a  period  of 
four  years.  It  has,  however,  since  remained  a  permanent  feature 
of  the  British  fiscal  system,  although  its  repeal  has  been  promised 
and  anticipated  by  various  administrations ;  and  in  the  general 
election  of  1874,  ^Ir.  Gladstone,  in  an  address  to  the  country, 
especially  asked  that  confidence  and  continued  administration  of 
the  government  be  given  him,  on  the  ground  that  he  contemplated 
an  early  repeal  of  the  income  tax.  Circumstances,  however,  have 
prevented  any  such  action,  and  in  subsequent  years  of  office  Mr. 
Gladstone  has  not  hesitated  to  raise  the  tax  whenever  the  neces- 
sity for  additional  revenue  became  imperative.  That  he  has  re- 
gretted his  inability  to  abolish  it  is  evident  from  his  saying  in  his 
financial  statement  in  1853  : 

"I  think  that  some  happier  Chancellor  of  the  Exchequer  may 
achieve  this  great  accomplishment,  and  that  some  future  poet  may 
be  able  to  sing  of  him — 

'He  took  the  tax  away 

And  built  himself  an  everlasting  name.'  " 

From  the  outset  the  income  tax  has  been  more  odious  and 
unpopular  in  Great  Britain  than  any  other  form  of  taxation. 
Among  statesmen  and  economists  there  is  hardly  any  dissent 
from  the  opinion  that  the  tax  is  bad  in  [)rinciple,  because  unequal 
and  unjust  in  its  assessment,  and  incapable  of  being  made  equal 
and  just;  and  this,  too,  although  the  administration  of  the  rev- 
enue laws  of  Great  Britain — owing  to  the  comparatively  small 
area  of  territory  subjected  to  supervision,  and  the  fact  that  the 
tenure  of  office  on  the  part  of  officials  is  dependent  solely  on  hon- 


56  SELECTED   ARTICLES 

esty  and  intelligence — is  wonderfully  efficient,  far  more  so  than 
can  be  expected  under  existing  conditions  in  the  United  States. 
The  annual  reports  of  the  British  commissioners  of  the  inland 
revenue  always  mention  extensive  evasions  of  the  income  tax. 
For  the  year  1864-65  the  amount  of  such  evasion  was  estimated  to 
have  been  equal  to  about  one-sixth  of  the  revenue  collected  under 
it.  The  demoralizing  effects  which  are  inevitably  produced  by 
the  habit  of  making  false  returns  respecting  income  are  regarded 
by  many  British  authorities  as  far  more  deplorable  than  those 
resulting  from  any  inequality  contingent  on  this  form  of  taxa- 
tion :  as  the  transition  from  a  fraud  upon  the  government  to  a 
fraud  upon  the  public  is  comparatively  easy.  On  this  point,  Mr. 
Gladstone,  speaking  in  1853,  said:  "I  believe  it  [an  income  tax] 
does  more  than  any  other  tax  to  demoralize  and  corrupt  the  peo- 
ple" ;  and  Mr.  Disraeli,  in  Parliament,  expressed  his  agreement 
with  Mr.  Gladstone  by  saying,  "The  odious  features  of  this  tax 
cannot  by  any  means  be  removed  or  modified." 

Attention  is  next  asked  to  the  recent  experience  of  the  United 
States  in  respect  to  an  income  tax.  Under  the  great  financial  ne- 
cessities of  the  federal  government  by  reason  of  the  war,  the  at- 
tention of  Congress  was  directed  to  an  income  tax  as  a  source  of 
revenue  as  early  as  the  summer  of  1861 ;  and  in  that  and  the  fol- 
lowing year,  laws  establishing  such  a  tax  were  created.  Their 
provisions  were,  however,  so  complicated,  and  the  methods  au- 
thorized by  them  so  inquisitorial,  that  the  commissioner  of  inter- 
nal revenue  reported  in  1863  that  they  deprived  the  tax  "of  all 
claims  to  public  favor."  The  revenue  returns  under  such  circum- 
stances were  very  moderate:  $2,741,858  in  1863,  and  $20,294,000 
in  1864.  In  this  latter  year  a  more  comprehensive  and  effective 
law  was  enacted,  which  was  followed  by  better  results ;  the  col- 
lections to  the  credit  of  the  income  tax  rising  from  $32,050,000 
in  1865  to  $72,982,000  in  1866,  and  $66,014,000  in  1867.  But  as 
the  necessity  for  very  large  revenues  on  the  part  of  the  govern- 
ment ceased  with  the  termination  of  the  war,  and  the  spirit  of 
patriotism  engendered  by  the  war  on  the  part  of  the  people 
abated,  the  collections  fell  off  very  rapidly.  Thus  between  1866 
and  1867  the  total  receipts  on  account  of  the  income  tax,  with- 
out any  change  in  the  law,  declined  from  $72,982,159  to  $66,014,- 


INCOME  TAX  57 

ooo;  and  in  1872.  with  an  exemption  of  $2,000,  only  72,949 
persons  in  the  United  States,  out  of  a  population  of  over 
39,000,000,  admitted  under  oath  that  they  were  in  receipt  of 
any  income  liable  to  taxation  in  excess  of  the  exemptions.  Those 
only  who  were  officially  and  intimately  connected  at  this  time 
with  the  internal  revenue  department  of  the  United  States 
treasury  can  form  any  adequate  idea  of  the  amount  of  perjury 
and  fraud  that  characterized  and  pervaded  the  country,  during 
the  years  1867-72,  as  the  outcome  of  the  then  existing  system 
of  internal  revenue.  And  American  ingenuity  was  never  more 
strikingly  illustrated — not  even  by  the  exhibits  of  the  patent 
office — than  it  was  at  that  time  in  devising  and  successfully 
carrying  out  methods  for  evading  the  taxes  on  incomes  and 
distilled  spirits.  The  w-riter,  as  United  States  special  com- 
missioner of  the  revenue,  proposed  in  the  latter  months  of 
1869  to  make  a  special  and  official  inquiry  as  to  the  influences 
which  were  then  operative  in  reducing  the  revenue  from  the 
income  tax,  and  make  public  the  results.  But  the  secretary 
of  the  treasury  refused  his  consent  to  the  proposition,  on  the 
ground  that  he  did  not  think  it  was  for  the  interest  of  the 
government  that  the  public  should  have  any  additional  informa- 
tion   on    this    subject. 

One  curious  feature  of  federal  experience  with  this  tax : 
the  tolerance  of  which  would  now  be  regarded  as  incompatible 
with  any  just  and  efficient  administration  of  it,  was,  that  the 
returns  made  under  it  were  thrown  open  to  the  public;  and  one 
commissioner  of  internal  revenue  instructed  his  officials  to 
have  them  published  in  the  pages  of  local  papers,  "in  order," 
as  he  said,  "that  the  amplest  opportunity  may  be  given  for 
the  detection  of  any  fraudulent  returns  that  may  have  been 
made."  This  idea  did  not,  however,  find  much  favor  with 
the  public,  who  in  fact,  during  the  later  years  of  the  tax,  were 
inclined  to  regard  with  great  equanimity  all  successful  attempts 
to  evade  it. 

The  income  tax  ceased  to  form  a  part  of  the  internal  rev- 
enue system  of  the  United  States  after  the  year  1872.  It  has, 
however,  since  been  made  a  part  of  the  tax  system  of  several 
of    the    states;    and    the    following    record    (hitherto    generally 


58  SELECTED  ARTICLES  . 

overlooked  b\-  the  public)  of  the  recent  administrative  ex- 
perience of  one  state  ought  to  be  especially  worthy  the  at- 
tention of  those  vi^ho  advocate  the  re-adoption  of  this  form 
of  taxation  by  the  federal  government. 

No  state  in  the  union  has  a  more  illiberal,  all-pervading 
system  of  taxation  than  Massachusetts,  and  in  no  state  is  the 
administration  of  tax-laws  more  stringent  and  arbitrary.  What 
Massachusetts  fails  to  accomplish  in  the  assessment  and  col- 
lection of  taxes,  would  therefore  seem  to  be  of  little  use  for 
any  of  the  other  states,  or  the  federal  government,  to  attempt 
with  any  anticipation  of  success.  This  Massachusetts  system 
finds  its  fullest  exemplification  in  the  city  of  Boston ;  and  the 
officials  who  constitute  its  department  of  municipal  taxation 
never  indulge,  as  the  taxpayers  well  know,  in  much  sentiment 
in  the  discharge  of  their  duties.  The  acknowledged  represen- 
tative of  this  board  for  many  years  never  hesitated  to  say 
that  he  recognized  but  one  principle,  and  that  was,  that  in  mat- 
ters of  taxation  the  taxpayer  had  no  rights  which  the  state 
was  bound  to  respect ;  and,  as  chairman  of  a  state  commis- 
sion which  some  years  ago  made  a  report  to  the  legislature, 
and  with  the  Declaration  of  Independence  confronting  him 
with  its  assertion  that  it  is  a  self-evident  truth  that  "all  men 
are  endowed  by  their  Creator  with  certain  inalienable-  rights," 
he  also  gravely  asserted  that  "the  individual  person  [in  Massa- 
chusetts] has  no  inalienable  rights  except  that  to  his  own 
righteousness." 

One  of  the  specialties  of  municipal  taxation  in  Boston,  un- 
der the  supervision  of  its  board  of  assessors,  is  an  income 
tax,  and  its  methods  of  administration  are  substantially  as 
follows :  Taxpayers  are  required  to  make  a  return  anually, 
and  in  detail,  of  all  their  property  which  the  law  makes  sub- 
ject to  taxation  (and  that  embraces  almost  everything  in 
Massachusetts  except  their  proprietary  interests  in  graveyards)  ; 
and  in  blanks  officially  furnished  for  such  purpose  there  is  a 
special  space  for  a  return  of  every  individual's  income.  If 
no  "return  is  made,  then  the  board  of  assessors  meet  in  secret 
in  a  upper  room  of  the  city  hall,  known  as  the  "dooming 
chamber,"    and    arbitrarily    determine    the    amount    of    income 


INXOME  TAX  59 

for  which  each  delinquent  shall  be  assessed;  and  from  such 
determination  there  is  practically  no  appeal.  The  amount  thus 
assessed  for  income  to  the  individual  is  then  "lumped  in"  with 
the  aggregate  of  his  other  taxes,  and  if  a  dissatisfied  tax- 
payer wishes  to  discover  what  amount  has  been  decided  upon 
as  his  income,  the  assessors  will  not  afford  him  any  infor- 
mation. Under  such  circumstances  it  might  naturally  be  sup- 
posed that  the  administration  of  an  income  tax  in  the  city 
of  Boston  would  be  an  unqualified  success.  But  what  are  the 
facts? 

The  Boston  "Advertiser,"  which  ought  to  be  regarded  as 
good  authority,  in  a  recent  issue  makes  the  following  state- 
ment: 

First,  comparatively  few  of  the  taxpayers  of  Boston  make 
any  returns  to  the  assessors  of  their  income.  Second,  the 
returns  that  are  made  are  not  open  to  the  inspection  of  the 
public.  There  is  no  law  in  Massachusetts  covering  this  point, 
but  one  of  the  Boston  assessors  is  reported  as  saying  that  if 
the  returns  were  open  to  public  inspection  none  would  be  made, 
as  the  chief  objection  of  taxpayers  to  filing  returns  was  the 
fear  that  their  incomes  from  business  or  professions  might 
be  known.  The  statutes  of  Massachusetts,  however,  provide 
that  the  returns  of  each  individual's  property  shall  be  made 
by  the  assessors  of  every  city  and  town  in  the  state  to  the 
secretary  of  the  commonwealth:  but  inquiry  shows  that  the 
Boston  assessors  make  no  such  returns.  Third,  although  the 
amount  annually  collected  from  an  income  tax  in  the  city  of 
Boston  is  very  considcral)le, — $840,000  in  1892, — it  probably  rep- 
resents, according  to  the  "Advertiser,"  "only  about  one-fourth 
of  7i'hat  is  due  the  city  from  incomes."  In  the  face  of  such 
an  exhibit  the  question  is  pertinent.  What  measure  of  suc- 
cess do  the  present  advocates  of  a  federal  income  tax  ex- 
pect will  follow  an  attempt  to  expand  the  Boston  system  of 
its  administration  over  an  area  of  country  extending  from 
Florida  to  Alaska?  One  would  naturally  think  that  the  les- 
son of  experience  which  the  government  and  the  people  of 
the  United  States  have  already  had  would  restrain  further 
experimenting  with  this  subject  until  the  next  war  or  the  ar- 
rival  of   the   millennium. 


6o  SELECTED   ARTICLES 

That  a  free  government  cannot  efficiently  collect  a  tax 
which  its  people  regard  as  unjust,  without  a  resort  to  des- 
potic methods  which  public  sentiment  in  turn  will  not  toler- 
ate, is  illustrated  in  this  further  tax  experience  of  Massa- 
chusetts. The  state  laws  require  that  citizens  who  are  share- 
holders in  corporations  organized  in  other  states  shall  be  taxed 
in  Massachusetts  on  the  market  value  of  shares  so  held;  and 
such  owners  are  required  to  make  a  return  under  oath  of  the 
amount  of  such  property  in  their  possession.  Yet  a  petition 
recently  presented  to  the  legislature  by  representative  members 
of  boards  of  trade  and  chambers  of  commerce  recites  that  the 
law  in  question  "is  ineffective  and  therefore  ridiculous ;  as  is 
proved  by  the  fact  that  although  the  market  value  of  shares 
of  foreign  corporations  held  by  citizens  of  Boston  alone  is 
known  to  be  over  $600,000,000,  the  amount  taxed  by  the  asses- 
sors of  Boston  is  only  estimated  at  $45,000,000;  and  nearly  all 
of  this  that  is  known,  is  taxed  to  the  unfortunate  people  whose 
estates  are  in  trust." 

A  few  other  points  bearing  on  the  proposition  to  re-enact 
a  federal  income  tax,  which  do  not  seem  to  have  attracted 
attention,  are  worthy  of  consideration.  Such  a  tax  necessarily 
involves  multiple  taxation  on  one  and  the  same  income,  per- 
son, and  property.  For  example :  a  citizen  of  any  state  would 
be  liable  in  the  first  instance  to  the  federal  tax  on  his  income ; 
second,  to  a  state  tax  on  the  same  income ;  third,  to  a  tax  on 
the  property  or  business  producing  the  income  in  virtue  of 
its  location  and  consequent  territorial  jurisdiction  of  the  state. 
In  some  states — Massachusetts,  for  example — the  state,  in  vir- 
tue of  its  jurisdiction  over  a  person,  taxes  him  also  for  prop- 
erty beyond  its  territorial  jurisdiction,  and  subject  to  taxation 
in  the  state  where  it  is  an  actuality.  Doubtless  such  duplica- 
tions in  a  greater  or  less  degree  will  be  inevitable  in  the  case 
of  all  federal  taxation.  But  when  so  many  sources  are  availa- 
ble to  the  national  government  for  obtaining  revenue,  it  would 
seem  to  be  impolitic  for  it  to  encroach  on  those  methods  which 
are  particularly  applicable  to  the  states :  as  income  taxes ; 
taxes  on  legacies  and  successions,  which  are  governed  and  pro- 
tected by  state  laws ;  and  on  franchises,  which  are  almost  ex- 


INCOME  TAX  6i 

clusively  granted  by  the  states  and  rarely  by  the  federal  gov- 
ernment. Certainly  there  would  seem  to  be  no  warrant,  in 
either  justice  or  expediency,  in  unnecessarilj'  favoring  such  a 
system  of  multiple  taxation,  thereby  increasing  the  real  or 
fancied  grievances  of  the  people  in  respect  to  all  taxation,  and 
creating,  by  reason  of  a  sense  of  injustice,  additional  tempta- 
tions on  the  part  of  the  taxpayer  to  fraud  and  evasion. 

Again,  all  modern  systems  of  income  taxation  have  recog- 
nized the  principle  of  discriminating  in  favor  of  persons  in 
receipt  of  comparatively  small  incomes;  and  have  provided 
as  a  fundamental  feature  of  their  policy  that  all  incomes  be- 
low a  certain  sum  should  be  exempted  from  assessment.  Such 
exemption,  except  in  the  case  of  the  United  States,  has  always 
been  of  a  comparatively  small  amount.  In  Great  Britain  it 
is  £150  ($750).  In  Germany,  under  the  communal  income  tax, 
it  is  from  $70  to  $100;  under  the  class,  or  state  tax,  about 
$600.  In  Austria  it  is  $113:  in  Denmark,  $215.  As,  in  theory, 
all  citizens  ought  to  contribute  in  proportion  to  their  revenue 
to  the  support  of  the  government  under  which  they  have  chosen 
to  live,  and  to  which  they  look  for  protection  in  respect  to  their 
persons  and  property,  the  exemption  of  any  from  an  income 
tax  can  only  be  justified  on  the  assumption  of  the  non-receipt 
by  the  citizen  of  an  income  beyond  what  is  necessary  to  de- 
fray the  expenses  of  a  moderate  living.  In  truth,  any  ex- 
emption under  a  general  income  tax  is  in  principle  an  act  of 
charity  on  the  part  of  the  government.  The  authors  of  the 
proposed  income  tax  now  before  Congress  especially  proclaim 
that  the  chief  object  sought  by  them  in  this  measure  is  to 
transfer  the  burdens  of  the  state  from  the  shoulders  of  the 
poor  to  those  of  the  rich.  It  is  therefore  interesting  to  note 
where  they  propose  to  draw  the  line  in  respect  to  charity,  and 
as  to  the  amount  of  property  the  possession  or  enjoyment  of 
which,  in  their  opinion,  constitutes  riches. 

If  we  assume  five  per  cent  as  about  the  present  annual 
average  profit  on  money,  land,  or  other  property  in  the  United 
States  over  and  above  all  charges  and  taxes,  then  an  exemp- 
tion of  $4,000,  in  an  assessment  under  an  income  tax,  would 
represent   an   accumulation,   or   business,   or   profession,   of   the 


62  SELECTED  ARTICLES 

value  of  $80,000.  If  we  take  the  rate  at  which  the  United 
States  can  borrow  money, — namely,  three  per  cent, — then  an 
exemption  of  $4,000  would  represent  an  accumulation  of  a 
citizen,  invested  in  United  States  securities,  of  $133,333-  And 
according  to  any  fair  interpretation  of  the  action  of  the  com- 
mittee reporting  a  $4,000  exemption,  a  citizen  who  is  worth  less 
than  $80,000  of  ordinary  property  yielding  income,  or  $133,000 
of  property  invested  in  United  States  bonds,  is  a  legitimate 
object  for  national  charity;  the  above  sums  representing  the 
dividing  line  in  the  United  States  between  those  who  are  en- 
titled to  be  regarded  as  poor  and  those  who  are  entitled  to 
be  considered  rich.  Such  an  assumption  finds  no  precedent  in 
fiscal  history.  Such  an  exemption  is  unwarranted  favoritism 
to  nine-tenths  of  the  well-to-do  people  of  the  United  States, 
who  are  abundantly  able  to  pay  any  just  proportion  of  the 
taxes  which  the  government  finds  it  necessary  to  impose  for 
its  support. 

No  man  is  a  freeman  whose  industry  and  capital  are  sub- 
ject to  exaction,  and  from  which  his  immediate  competitors 
are  entirely  exempt.  Equality  of  taxation  all  of  persons  and 
property  brought  into  open  competition  under  life  circum- 
stances is  necessary  to  produce  equality  of  condition  for  all 
in  all  production,  and  in  all  the  enjoyments  of  life,  liberty, 
and  property.  And  government,  whatever  name  it  may  assume, 
is  a  despotism,  and  commits  acts  of  flagrant  spoliation,  if  it 
grants  exemption  or  exacts  a  greater  or  less  rate  of  tax  from 
one  man  than  from  another  man,  on  account  of  the  one  own- 
ing or  having  in  his  possession  more  or  less  of  the  same  class 
of  property  which  is  subject  to  the  tax.  If  it  were  proposed 
to  levy  a  tax  of  two  per  cent  on  annual  incomes  below  $4,000 
in  amount,  and  exempt  all  incomes  above  this  sum,  the  un- 
equal and  discriminating  character  of  the  exemption  would  be 
at  once  apparent ;  and  yet  an  income  tax  exempting  all  in- 
comes below  $4,000  is  equally  unjust  and  discriminating.  In 
either  case  the  exemption  cannot  be  founded  or  defended  on 
any  sound  principles  of  free  constitutional  government ;  and  is 
simply  a  manifestation  of  tyrannical  power,  under  whatever 
form  of   government   it   may  be   enforced.     The  great   republi- 


INCOME  TAX  63 

can  principle  of  equality  before  the  law,  and  constitutional 
law  itself,  alike  preclude  any  exemption  of  income  derived  from 
like  property. 

Finally,  it  is  claimed  that  an  income  tax  is  a  present  neces- 
sity to  meet  an  urgent   (but  probably  a  temporary)   need  of  the 
government    for   more   revenue;    and   that   by   no    other   method 
can  such  additional  revenue  be  obtained  more  readily  and  con- 
veniently.    But  for  such  claim  there  does  not  seem  to  be  any 
good   and    sufficient    warrant.      No    country    has    such    available 
and  comparatively  untouched  sources  of  revenue  as  the  United 
States.     It  admits  of  demonstration  that  from  the  present  rate 
of  taxation  on  distilled  spirits,   and   from   a  moderate  increase 
of  the  taxes  on  fermented  liquors  and  tobacco, — such  as  would 
not  diminish  consumption  or  create  undue  temptations  for  rev- 
enue   evasions. — the    federal    government    can    obtain    a    revenue 
sufficient  to   defray  all   its   ordinary   expenditures,   including  in- 
terest on  all  its  debts,  and  have  in  addition  a  large  annual  sur- 
plus applicable  for  other  purposes.     If  slight  taxes  in  addition 
were  imposed   on   the   importation   of    sugar,   or   of    sugar,  tea, 
and  coffee,   no   other  taxes   would  need  to  be   irhposed  by  the 
federal   government.     It   is    safe  to   assert  tl^at   in    all   financial 
history   no    parallel    can   be    found   for    such    an    exhibit    of   the 
finances  of  any   nation.     If   such  an  opportunity  could  be  pre- 
sented to  the   finance   minister   or   the   tax-burdened  people   of 
any  other  nation,  it  would  be  embraced  with  great  and  universal 
exultation    and    rejoicing;    and    if    the    financial    policy    of    the 
United  States  could  be  considered  and  regulated  by  legislation, 
apart    from    party   politics,    as    such    legislation    is    always    con- 
sidered and  regulated  in  all  other  countries,  there  would  hard- 
ly  be    a    doubt    that    some    such    system    of    taxation    as    above 
indicated  would  be  adopted.     As  it  is,  a  system  of  class  legis- 
lation,   full    of   the    spirit   of   communism,    seems   to   find    favor 
with  the  .Anu-ricaii   people. 


64  SELECTED  ARTICLES 

Forum.  19:48-56.  March,  1895. 

Ife  the  Income  Tax  Constitutional  and  Just? 
Edwin  R.  A.  Seligman. 

When  we  speak  of  uniform  and  equal  taxation,  we  mean 
substantial  uniformity,  substantial  equality.  Absolute  equality 
it  is  impossible  for  human  agency  to  secure ;  absolute  uniformity 
it  has  never  been  the  object  of  legislation  to  attain.  All  that 
government  can  hope  to  achieve  is  to  treat  all  the  individuals 
in  the  same  class  equally  and  uniformly.  But  this  does  not 
mean  that  no  distinction  can  be  made  between  classes.  For 
instance,  it  would  be  plainly  unconstitutional  if  a  state  were  to 
tax  A  and  to  exempt  B  who  is  in  precisely  the  same  class  or 
condition.  But  it  is  perfectly  competent  for  the  state  to  say  that 
certain  classes  of  property  should  be  exempt,  like  churches,  or 
educational  institutions,  or  manufacturing  enterprises,  or  timber 
lands,  or  household  furniture.  And  it  is,  again,  perfectly  com- 
petent for  the  state  to  exempt  property  to  the  extent  of  $250  or 
even  $1,000,  as  is  the  case  in  several  of  our  states  to-day.  All 
the  individuals  in  the  class  are  treated  uniformly,  but  a  distinc- 
tion is  made  between  the  classes.  And  these  distinctions  have  very 
generally  been  upheld  in  this  country  as  not  in  violation  of  a 
substantial' uniformity.  It  is  needless  to  give  decisions,  which 
may  be  found  in  any  legal  treatise.  Not  only  have  these  ex- 
emptions from  the  general  or  property  tax  been  upheld,  but  the 
principle  of  graduated  taxation  itself  has  been  upheld.  Some 
of  our  states  levy  progressive  taxes  on  corporations,  saying  that 
corporations  with  a  certain  income  shall  pay  a  certain  rate  and 
that  corporations  with  a  higher  income  shall  pay  a  different  rate. 
So  again  the  inheritance  tax  in  New  York  exempts  $10,000;  the 
collateral  inheritance  tax  in  other  states  makes  the  same  amount 
of  property  pay  different  rates  according  as  it  goes  to  different 
classes  of  relatives ;  and  the  direct  inheritance  tax  of  Ohio  levies 
a  progressive  scale  in  different  amounts  of  property,  even  though 
it  all  goes  to  the  same  person.  All  these  laws  are  held  to  con- 
form to  the  substantial  uniformity  demanded  by  the  constitutions. 


INCOME  TAX  65 

This  is  as  it  should  be.  The  object  of  uniformity  is  to  secure 
equality  or  justice.  Yet  the  final  test  of  equal  justice  must  be 
sought  in  the  well-considered  public  policy.  It  is  the  social  con- 
sensus or  the  public  sentiment  which  in  the  last  resort  is  our 
only  test  of  justice  in  taxation,  as  of  justice  in  other  human  rela- 
tions. If,  therefore,  certain  distinctions  or  exemptions  are  made 
in  the  interest  of  the  whole  community  and  for  the  sake  of  the 
public  welfare,  the  substantial  equality  demanded  by  the  constitu- 
tion is  attained.  An  absolute  uniformity  would  in  such  a  case  de- 
feat the  object  of  the  constitution  and  prevent  the  equal  justice 
aimed  at  by  organized  society. 

Now  what  are  the  facts  with  regard  to  the  income  tax? 
From  the  legal  point  of  view  can  it  be  seriously  maintained  that 
a  thousand  dollar  exemption  from  the  general  property  tax  or 
a  ten  thousand  dollar  exemption  from  the  inheritance  tax  is 
constitutional,  but  that  a  four  thousand  dollar  exemption  from 
the  income  tax  is  unconstitutional?  If  this  provision  in  the  in- 
come tax  law  is  unconstitutional,  then  we  must  overturn  hun- 
dreds of  decisions  in  our  state  tribunals,  and  completely  re- 
verse the  general  tendency  of  fiscal  development  throughout 
the  civilized  world.  We  must  say  that  uniformity  means  ab- 
solute uniformity,  and  declare  unconstitutional  hundreds  of 
existing  laws  which  aim  merely  at  substantial  uniformity. 
There  is,  therefore,  very  little  prospect  of  the  tax  being  declared 
unconstitutional  on  that  ground. 

This  brings  us  to  the  question  whether  the  income  tax  is 
indeed  a  just  measure.  Some  people  say  it  is  socialistic,  and 
that  the  state  has  no  right  to  confiscate  earnings.  This  objection 
scarcely  deserves  a  refutation.  It  entirely  misconceives  the  re- 
lations of  the  individual  to  the  state. *"  The  cry  of  socialism  has 
always  been  the  last  refuge  of  those  who  wish  to  clog  the  wheels 
of  social  progress  or  to  prevent  the  abolition  of  long-continued 
abuses.  The  factory  laws  were  in  their  time  dubbed  socialis- 
tic. Compulsory  education  and  the  public  post-office  system 
were  called  socialistic.  There  is  scarcely  a  single  tax  which  has 
ever  been  introfluccd,  which  has  not  somewhere  or  other  met  with 
the  same  objection.  This  is  true  no  less  of  the  new  inheritance  tax 
in  some  of  our  commonwealths  and  in  England  than  of  the  new 


66  SELECTED   ARTICLES 

property  tax  in  Holland  and  Prussia.  But  the  argument  no- 
where carried  any  weight.  In  fact,  if  there  is  any  socialism, 
it  would  be  far  more  obvious  in  the  property  tax,  which  ex- 
empts the  earnings  of  the  poorer  classes,  than  of  the  income 
■  tax  which  reaches  earnings  from  other  sources  than  mere 
property.  Yet  we  have  become  so  accustomed  to  the  property 
tax  that  the  idea  of  its  being  socialistic  seems  ridiculous. 

Others  have  said  that  the  income  tax  is  un-American  and 
undemocratic.  But  this  objection  is  scarcely  less  absurd.  It 
is  a  matter  of  common  knowledge  that  the  income  tax  has  been 
most  fully  developed  precisely  in  the  most  democratic  countries, 
like  Switzerland,  England,  and  Australia,  and  that  the  whole 
tendency  toward  democracy,  even  in  non-republican  states,  has 
gone  hand  in  hand  with  the  extension  of  property  and  income 
taxation. 

A  more  formidable  objection  is  the  old  one  that  the  income 
tax,  however  wise  in  theory,  works  badly  in  practice.  We  must, 
however,  not  forget  that  the  real  inquiry  is  not  what  is  absolute- 
ly good  (for  that  is  unattainable)  but  what  is  relatively  best. 
And  it  has  been  shown  by  competent  evidence  that  if  we  com- 
pare the  income  tax  during  the  Civil  War  period  with  our 
general  property  tax  in  the  states,  the  former  tax  with  all 
its  imperfections,  crudities,  and  frauds  was  far  more  successful 
than  the  latter,  and  that  it  succeeded  in  reaching  many  of  those 
who  contrived  to  escape  the  tax  on  personalty. 


Forum.  41:513-20.  June,  1909. 

Shall  Incomes  Be  Taxed?  Henry  Litchfield  West. 

The  British  income  tax  in  one  form  or  another  has  been  in 
force  almost  continuously  for  no  years,  and  since  1842,  more 
than  half  a  century  ago,  there  has  practically  been  no  period 
when  the  law  was  not  in  force.  For  the  fiscal  year  which 
ended  March  31,  1909,  with  a  population  in  Great  Britain  and 
Ireland  of  44,500,000,  the  revenue  from  the  property  and  income 
tax  was  $165,000,000,  being  the  greatest  single  source  of  revenue 


INXOME  TAX  67 

in  the  United  Kingdom.  A  curious  fact  about  the  administration 
of  the  tax  is  that  the  actual  revenues  always  exceed  the  esti- 
mated receipts.  The  lowest  rate  of  charge  since  the  foun- 
dation of  the  present  system  in  1853  has  been  two  pence  on 
the  pound  sterling,  which  would  be  four  cents  in  $4.86,  or  a 
fraction  under  one  cent  on  the  dollar.  The  highest  charge  has 
been  one  shilling,  three  pence,  or  approximately  thirty  cents  to 
the  $5.00. 

The  large  revenue  which  Great  Britain  enjoys  from  the  in- 
come tax  is  due  to  the  fact  that  there  is  one  taxpayer  in  each 
forty-four  of  the  population.  In  1907  there  was  a  total  of 
578,000  assessments  upon  incomes  from  business,  professions, 
etc.,  while  the  employees  of  business  firms  and  government  and 
public  companies  brought  the  total  up  to  996,000,  or  near  the 
million  mark.  Of  this  grand  total  no  less  than  750,000  paid 
a  tax  upon  incomes  not  exceeding  $1,500  per  annum.  As  the 
incomes  increase  in  size  the  number  of  assessments  gradually 
decrease  until  the  returns  show  only  949  persons  or  firms  whose 
incomes  exceed  $250,000  a  year.  Should  an  income  tax  be  im- 
posed in  the  United  States  the  proportionate  number  of  tax- 
payers would  be  much  less,  as  no  incomes  less  than  $5,000  are 
to  be  taxed,  while  in  England  only  incomes  less  than  $900  es- 
cape paying  tribute. 

Although  Senator  Aldrich  declared  some  years  ago  that  the 
income  tax  was  socialistic,  populistic  and  democratic  and  that 
no  one  advocated  it  unless  he  was  interested  in  securing  a  re- 
distribution of  wealth  in  the  United  States,  the  fact  is  that  the 
utterance  of  President  Taft  has  done  much  toward  giving 
respectability,  as  it  were,  to  the  proposed  legislation.  It  may 
not  be  generally  known,  also,  that  eminent  Republican  leaders 
in  the  past  have  been  upholders  of  the  income  tax  proposition. 
For  instance,  the  late  Senator  Sherman,  of  Ohio,  declared  that  ^ 
the  income  tax  was  the  least  inquisitorial  and  unjust  of  all 
the  taxes  imposed  by  the  government.  "It  is  the  only  tax 
levied  in  the  United  States,''  he  said,  "that  f.ills  uixm  ])roperty 
or  office  or  on  brains  that  yield  property,  and  in  this  respect  is 
distinguished  from  all  other  taxes  levied  by  the  United  States, 
all    of    which    are    levied    upon    consumption,    the    consumption 


68  SELECTED  ARTICLES 

of  the  rich  and  the  poor,  the  old  and  the  young."  He  asserted, 
also,  that  the  consumption  of  the  rich  does  not  bear  the  same 
relation  to  the  consumption  of  the  poor  that  the  income  of 
the  one  does  to  the  wages  of  the  other,  and  he  predicted  that  as 
wealth  accumulated  in  this  country  this  injustice  in  the  fun- 
deniental  basis  of  our  system,  as  he  termed  it,  would  be  felt  and 
forced  upon  the  attention  of  Congress. 

At  the  end  of  a  long  line  of  Republican  leaders  who  have 
stood  sponsor  for  the  income  tax  stands  Theodore  Roosevelt, 
who,  while  president  of  the  United  States,  advocated,  in  more 
than  one  message  to  Congress,  the  enactment  of  an  income  tax 
law,  asserting  that  it  was  an  absolutely  essential  feature  of  our 
system  of  taxation.     To  quote  Mr.  Roosevelt's  own  words : 

"Wh^n  our  tax  laws  are  revised  the  question  of  an  Income 
tax  and  an  inheritance  tax  should  receive  the  careful  attention  of 
our  legislators.  In  my  judgment  both  of  these  taxes  should  be 
part  of  our  system  of  federal  taxation.  *  *  *  *  The  graduated  in- 
come tax  of  the  proper  type  would  be  a  desirable  feature  of  federal 
taxation,  and  it  is  to  be  hoped  that  one  may  be  devised  which  the 
Supreme  Court  will  declare  constitutional." 

The  belief  expressed  by  two  presidents  that  the  question  of 
the  constitutionality  of  the  tax  has  not  been  eternally  settled 
has  gone  far  toward  making  the  subject  one  of  earnest  dis- 
cussion. The  point  which  is  herein  sought  to  be  emphasized  is 
that  the  opinion  of  the  Supreme  Court,  standing,  as  it  does, 
in  direct  antagonism  to  the  decisions  of  a  hundred  years  and 
declaring  unconstitutional  a  tax  that  in  practically  similar  form, 
was  effectively  administered  for  more  than  a  decade,  is  not 
accepted  as  the  final  judgment.  As  long  as  this  is  the  case 
and  as  long  as  men  of  high  standing  in  the  national  legislature 
feel  that  an  income  tax  is  a  righteous  tax,  just  so  long  shall 
we  have  the  justice  of  its  imposition  pictured  to  the  public  mind. 
There  are  men  who  believe  that  the  Supreme  Court  erred  and 
who  are  determined  that  there  shall  be  another  adjudication  of 
the  question ;  and  as  long  as  these  men  continue  to  occupy  com- 
manding stations  in  public  life,  it  is  certain  that  they  will  not 
allow  the  subject  to  remain  quiescent. 


INCOME  TAX  69 

Harper's  Weekly.  52:32.  June    6,   1908. 

New  French   Income  Tax.   M.  L.   Girault. 

Of  the  taxes  inflicted  on  us  by  the  old  system  some  were 
funny,  some  were  unjust,  as,  for  instance,  taxing  the  whole  of 
an  inherited  capital  without  first  deducting  from  it  the  debts 
of  the  estate ;  some  even  were  pernicious,  like  our  tax  on  doors 
and  windows,  putting  a  premium  on  things  as  necessary  to  exist- 
ence as  air  and  light.  But  as  the  property  owner  was  taxed  only 
on  the  appearance  of  property,  he  was  thereby  encouraged  to 
thrift  and  economy,  which  are  the  two  vital  characteristics  of 
the  French  nation. 

Now  he  is  to  be  taxed  on  the  property  itself,  which  is  perfect- 
ly fair;  but  the  amount  imposed  is  to  be  progressive — that  is 
to  say,  the  more  he  owns,  the  higher  his  percentage  of  tax- 
ation is  to  be.  For  example,  he  may  be  obliged  to  give  five 
per  cent,  on  an  income  of  3000  francs,  ten  per  cent,  on  8000 
francs,  and  fifteen  per  cent,  on  12,000  francs  per  annum.  Under 
a  certain  amount,  probably  under  2000  francs  income,  there  will 
be  no  taxation  at  all,  but  above  15,000  francs  the  charge  is  to  be 
tremendous. 

Of  course  this  plan  appeals  to  the  masses.  Their  argument  in 
favor  of  it  is  simple.  "Why  should  not  a  fellow  with  plenty  of 
money  give  more  to  the  state  than  a  laborer?"  they  ask.  "A 
few  thousand  francs  more  or  less  do  not  mean  anything  to  him. 
He  will  not  miss  them,  whereas  every  penny  counts  in  the 
budget  of  the  poor." 

It  is  true  enough,  and  we  cannot  wonder  at  the  uneducated 
being  deceived  by  an  ideal  which  has  fascinated  such  men  as  J. 
B.  Say  and  Montesquieu. 

Yet,  at  a  glance,  it  is  easy  to  see  that  this  theory  of  a  pro- 
gressive income  tax  could  justify  itself  only  on  the  condition  that 
the  benefits  derived  by  the  people  from  the  state  increased  ac- 
cording to  their  percentage  of  taxation.  Now  in  reality  the 
reverse  happens.  It  does  not  cost  any  more  to  the  government 
to  protect  one  man  than  protect  another  man,  to  look  after 
large  incomes  than   after  small  ones;  and  the  millionaire  does 


70  SELECTED   ARTICLES 

not  wear  out  the  state  roads  any  more  than  the  pauper.  On 
the  other  hand,  many  public  services,  such  as  public  instruction, 
savings-banks,  public  charities,  are  mainly  and  in  some  instances 
exclusively  organized  to   serve  the   interest   of  the   impecunious. 

It  is  chimerical  of  the  poor  to  think  they  are  able  to  escape 
taxation.  As  soon  as  the  law  is  applied,  they  are  going  to 
sufifer  from  what  is  known  to  economists  as  "phenomenon  of 
repercussion,"  and  they  will  find  themselves  taxed  indirectly 
very  heavily  when  they  are  no  longer  taxed  directly.  The  land- 
lord will  raise  his  rent,  the  baker  the  price  of  his  bread,  the 
grocer  that  of  his  groceries.  This  is  so  certain  to  happen  that 
the  Chamber  of  Deputies,  while  still  planning  the  income  tax 
bill,  has  already  considered  the  necessity  of  raising  the  salary 
of  all  government  employees  in  prevision  of  a  sure  increase  in 
the  cost  of  living. 

Those  whom  the  law  intends  to  reach,  particularly  the  capi- 
talists, are  going  to  evade  the  difficulty  by  investing  their  money 
outside  of  France.  Since  the  first  bill  was  voted  in  March, 
7,000,000  francs  have  disappeared  from  the  Paris  Bourse,  caus- 
ing serious  injury  to  trade  and  industry. 

The  opportunity  of  the  capitalist  to  cast  oflf  most  of  his 
duty  as  a  citizen  throws  the  whole  of  the  burden  upon  the  hard- 
working poor,  in  a  word,  upon  the  most  deserving  part  of  the 
nation,  and  it  falls  as  a  crushing  blow.  Men  of  this  class  are 
not  well  off  at  best,  and  it  is  hard  to  figure  out  how  they  can 
manage  to  face  any  new  financial  responsibilities. 


Independent.   67:178-82.   July  22,    1909. 

Reason  for  the  Income  Tax.    Albert  B.    Cummins. 

It  is,  of  course,  impossible  to  state  with  absolute  precision 
the  revenues  and  expenditures  of  the  government  for  the  future. 
We  can,  however,  arrive  at  approximate  conclusions,  as  the 
treasury  department  arrives  at  them  in  sending  Congress  its 
estimates  for  the  ensuing  years.  Taking  the  most  conservative 
position,  to  be  always  on  the  safe  side,  let  us  glance  at  the  pros- 


INCOME  TAX  71 

pect  immediately  before  us,  during  the  next  two  fiscal  years, 
ending  June  30,  1910  and  191 1.  The  expenditures  have  already 
been  determined  in  the  case  of  the  first  year.  We  have  appro- 
priated (during  the  last  session)  $1,044,401,857.12  to  carry  on 
the  affairs  of  the  government  for  the  year  ending  June  30, 
1910.  To  this  must  be  added  $26,080,875  for  contracts  author- 
ized, which  are  equivalent  to  appropriation.  Should  Congress 
determine  to  provide  for  the  entire  cost  of  the  Panama  canal 
by  the  issue  of  bonds,  we  can  deduct  the  $37,000,000  appropriated  / 
for  that  purpose ;  but  from  some  source  we  must  derive  suf- 
ficient revenue,  during  the  ensuing  year,  to  cover  the  assured 
sum  of  $1,033,482,732.12. 

Our  revenue  from  the  post  office  department  is  less  than 
nothing.  It  will  result  in  a  deficit  estimated  at  from  $16,000,000 
to  $20,000,000.  It  is  thoroly  optimistic  to  estimate  that  our 
receipts  from  so-called  internal  revenue  will  be  $255,000,000. 
From  all  other  sources  we  cannot  except  more  than  $64,000,000. 
So  that,  looking  at  it  most  hopefully,  there  will  remain 
$479,790,362.12  to  be  provided  for  thru  custom  receipts — or  by 
some  other  method  of  taxation. 

In  the  careful  estimate  which  he  gave  the  Senate,  Senator 
Aldrich  stated  that  if  the  rates  in  the  present  bill  had  been  applied 
to  the  imports  of  1907  they  would  have  raised  $8,000,000  more 
than  was  realized,  and  that  our  imports  for  the  coming  year 
would  probably  be  as  large  as  in  1907. 

We  may  accept  his  judgment  as  to  the  comparative  efficiency 
of  the  two  bills;  but  the  year  1907  was  one  of  phenomenal  com- 
mercial activity,  to  which  we  shall  hardly  return  so  quickly, 
after  the  depression  of  1908,  and  if  the  present  bill  accomplishes 
its  purpose  of  encouraging  home  industries  it  is  also  reasonable 
to  suppose  that  we  shall  have  made  some  progress  in  supplying 
our  markets  with  home  productions.  It  is  true  that  at  present 
we  are  gaining  rapidly  over  the  revenues  of  1908,  from  custom 
duties,  but  this  is  largely  accounted  for  by  the  rush  of  importa- 
tions of  many  articles  upon  which  it  is  known  that  the  duties 
are  to  be  increased.  For  the  first  five  months  of  the  present 
calendar  year  our  customs  receipts,  in  s\nte  of  the  exigencies 
of  the  case,  are  but  95  per  centum  of  what  they  were  in  1907, 


72  SELECTED  ARTICLES 

and  it  would  be  most  unreasonable  to  anticipate  that,  for  the 
year  ending  June  30,  1910,  if  the  old  rates  were  in  effect,  we 
could  collect,  at  the  custom  houses,  more  than  $315,621,696. 
Assuming  that  the  new  bill  will  add  $8,000,000  upon  the  same  im- 
portations, and  that  the  importations  will  not  fall  ofif,  the  most 
hopeful  prospect  for  June  30,  1910,  is  a  record  of  custom  re- 
ceipts amounting  to  $323,621,695,  against  the  required  $479,790,- 
362.12.  The  probable  deficit  of  $156,168,677.12  is  one  argument, 
from  1910,  for  an  income  tax. 

In  the  case  of  191 1,  much  has  been  said  of  a  spirit  of  economy 
which  is  to  dominate  the  next  session  of  Congress.  I  am  per- 
suaded that  there  are  many  opportunities  for  retrenchment,  but 
it  is  idle  to  expect  that  if  we  maintain  the  government  as 
now  established,  there  can  be  any  material  reduction  in  our 
)J  expenses.  ^We  are  constantly  assuming  new  duties,  taking  on 
new  functions  and  receiving  stronger  and  stronger  demands  in 
every  direction  for  increased  appropriations.  There  is  no  fair- 
minded  man  but  knows  that  for  every  dollar  we  can  save  thru 
the  exertion  of  economy  in  the  maintenance  of  public  affairs 
as  now  established  we  shall  expend  two  dollars  in  the  enlarge- 
ment of  national  functions.  The  condition  can  be  put  even 
stronger,  for  during  the  last  session  Congress  made  no  appropria- 
tion for  the  improvement  of  waterways,  except  for  the  continu- 
ance of  work  in  progress,  and  no  material  appropriation  for 
public  buildings.  Both  will  be  strenuous  in  their  demands  upon 
the  next  session.  The  efforts  of  the  army  and  navy  to  reduce 
their  demands  for  the  next  session  amount,  largely  to  postponing, 
for  one  year,  such  expenditures  as  can  be  delayed.  It  is  very 
conservative  to  estimate  that  our  appropriations  for  the  fiscal 
year  ending  June  30,  191 1,  as  before  not  including  the  regular 
post  office  appropriation  or  the  Panama  canal,  will  amount  to 
$840,000,000. 

Allowing  for  the  natural  increase  in  internal  revenue,  that 
receipt  will  be  $260,000,000.  From  other  sources  admitting 
$65,000,000,  and  allowing  $340,000,000  from  customs,  which  is 
nearly  $8,000,000  larger  than  it  has  ever  been,  the  deficit  for  191 1 
will  be  $175,000,000. 

Even  if  we  were  to  assent  to  a  policy  of  despoiling  the  sinking 


INCOME  TAX  73 

fund  and  should  we  deduct  $30,000,000  for  the  currency  fund, 
we  should  still  have  a  deficit  of  $66,168,677  and  $85,000,000, 
without  the  least  hope  of  increasing  our  receipts  from  accustomed 
resources,  or  of  diminishing  our  expenditures.  It  is,  therefore, 
manifest  that  we  must  adopt  some  system  that  will  permanently 
add  to  our  revenue — and  add  to  it  more  than  the  $25,000,000 
estimated  as  the  result  of  a  tax  on  the  net  earnings  of 
corporations.  We  shall  require  all  of  the  revenue  that  can  be 
raised  by  a  tax  of  2  per  centum  upon  all  incomes  above  $5,000,  / 
including  gifts,  bequests  and  inheritances. 

It  is  a  fallacy  to  urge  that  the  establishment  of  an  income 
tax  may  be  used  as  a  weapon  against  protection.  The  protective 
system  can  have  no  more  efficient  friend  and  ally  than  a  perma- 
nent well-administered  income  tax  law.  The  time  will  come  and 
that  before  long,  when  protection  will  be  possible  only  as  it  is 
coupled  with  some  provision  for  adding  to  our  revenue.  And  as 
our  home  production  multiplies  under  protection,  our  importa- 
tion of  competitive  articles  will  necessarily  grow  comparatively 
less  and  in  order  to  keep  up  the  revenue,  if  we  have  no  such 
supplements  as  an  income  tax  that  is  adequate,  we  shall  be  com- 
pelled to  increase  the  import  duties  upon  those  things  which  we 
do  not  produce.  Will  the  people  of  this  country  endure  such  a 
tax? 

When  the  issue  is  squarely  presented  it  will  be  found  that 
the  great  majority  will  insist  upon  raising  the  additional  revenue 
by  a  tax  which  will  make  those  who  are  in  the  enjoyment  of 
the  greatest  wealth  bear  a  larger  part  of  the  public  burden. 
Either  we  must  have  some  such  tax  or  protection  must  give  way 
in  the  near  future,  in  order  that  we  may  have  a  revenue  from 
competitive  importations.  If  we  are  to  save  protection  as  a 
governmental  policy  we  must  exercise  some  other  taxing  power. 
What  shall  it  be?  The  general  government  will  never  adopt 
as  a  permanent  part  of  its  system  a  tax  apportioned  among  the 
states  according  to  population.  Nothing  less  than  the  life  of 
free  institutions  will  ever  warrant  even  the  temporary  imposition 
of  a  tax  on  that  basis.  Our  only  recourse  is  to  some  form  of 
what  has  been  called  "indirect  taxation."  Of  these,  every  form  / 
of  an  income  tax  which  can  be  laid  in  harmony  with  the  decision 


74  SELECTED  ARTICLES 

of  the  Supreme  Court  in  the  "Pollock  case"  is  so  unequal, 
unjust  and  oppressive  that  its  adoption  as  a  permanent  measure 
will  not  be  accepted.  We  are  therefore  remitted,  in  all  of  our 
efforts  for  the  future,  to  practically  three  forms  of  taxation; 
first,  an  income  tax;  second,  an  inheritance  tax;  third,  some  en- 
largement of  what  we  call  the  internal  revenue  tax,  such  as  stamp 
taxes  and   the   like. 

Forgetting  for  a  moment  the  questioned  validity  of  an  in- 
come tax,  which  of  the  three  forms  is  it  most  expedient  for  the 
government  to  employ?  Stamp  taxes,  in  the  very  nature  of 
things,  are  for  emergencies,  and  in  ordinary  conditions  are  un- 
just and  unfair,  because  they  are  imposed  indiscriminately,  and 
must  fall  in  greater  comparative  proportion  upon  those  who 
cannot  afford  to  pay  them  than  upon  those  who  can.  They  are 
extremely  unpopular  in  America  and  the  source  of  constant  dis- 
content. This  leaves  the  income  and  inheritance  tax — which,  to 
my  mind  should  be  combined,  as  in  the  amendment  which  I  in- 
troduced in  the  Senate — as  the  only  practicable  resource.  I  have 
never  felt  that  an  income  tax  has  not  some  objectionable  features, 
but  they  are  trivial  and  ephemeral  compared  with  the  objections 
to  any  other  form  of  taxation.  If  it  is  evident  that  we  must, 
now  or  in  the  near  future,  resort  to  some  permanent  form  of 
taxation  not  now  employed,  inherent  justice  demands  that  we 
take  incomes  rather  than  any  other  kind  of  property,  whether 
tangible  or  intangible. 

The  fundamental  merit  of  the  tax  on  incomes  is  that  it 
places  the  burdens  of  government  upon  those  who  are  best  able 
to  bear  them.  It  discards  unproductive  property  and  unproduct- 
ive labor,  exacting  but  a  small  percentage  of  actual  gains,  profits, 
and  earnings.  It  exacts  nothing  which  is  needed  for  either  the 
necessities  or  the  comforts  of  life. 

It  is  urged  against  this  view  that  property  already  pays  its 
share  of  the  expenses  of  the  government,  and  in  a  sense  it 
can  be  argued  that  wealth,  or  property,  pays  all  the  taxes  that 
are  contributed  to  the  support  of  organized  society,  just  as  there 
are  arguments  from  which  the  conclusion  can  be  fairly  deducted 
that  all  such  contributions  are  really  a  tax  upon  consumption. 
The  thought   intended   to   be   exprest   by  the   argument   is   that 


INCOME  TAX  75 

the  man  who  has  made  little  accumulation  of  property,  whose 
name  is  not  on  the  assessment  role,  is  not  bearing  his  share 
of  the  expense  of  government  and  that  if  additional  revenue 
is  necessary  it  should  be  imposed  upon  consumption  rather  than 
on  accumulated  property.  But  the  tenant  practically  pays  the 
taxes  assessed  against  his  dwelling.  The  poorest  customer  of 
the  dry  goods  and  grocery  pays  the  assessments  against  what 
he  purchases.  The  workman  who  pays  five  cents  to  ride  home, 
after  his  day  of  toil,  pays  part  of  the  taxes  laid  upon  the  prop- 
erty of  the  street  car  company.  Wherever  we  turn  we  reach 
the  same  conclusion,  and  it  is  my  deliberate  judgment  that  the 
men  who  accumulate  nothing  carry  vastly  more  than  their  fair 
share  of  the  weight  of  the  government. 

Every  tax  of  which  I  have  ever  heard  or  read,  save  the  poll 
tax,  is  laid  upon  property,  either  tangible  or  intangible,  and  in 
some  form  falls,  finally,  upon  the  people  who  use  or  consume 
the  property  taxed.  Therefore  let  us  not  fear  that  in  putting 
upon  incomes  the  duty  proposed  we  are  dealing  unjustly  or  un- 
fairly by  the  wealth  of  the  country.  It  is  only  when  the  tax  is 
imposed  upon  the  most  moderate  incomes  that  it  becomes  op- 
pressive. There  is  a  principle  which  I  think  is  recognized  in  all 
civilized  governments,  warranting  the  exemption  of  those  in- 
comes which  are  fairly  required  for  the  necessary  expenses  in- 
cident to  the  support  and  education  of  the  family.  As  a  public 
policy  it  is  better  to  allow  a  man  to  discharge  the  imperative 
duties  he  owes  to  himself  and  to  his  family  before  he  is  called 
upon  to  discharge  the  duty  which  he  owes  to  his  government. 
In  dire  emergencies  this  might  be  strained,  but  taking  things  as 
they  are  I  do  not  believe  that  the  lesser  incomes  should  be 
brought  within  the  scope  of  the  statute.  The  point  at  which 
the  tax  should  begin  is  largely  a  matter  of  judgment  and  arbi- 
trary, but  upon  the  whole  I  believe  that  exempting  incomes  of  y 
$5,000  or  less  will  l)f  found  more  satisfactory  than  a  smaller 
amount. 


76  SELECTED   ARTICLES 

Journal  of  Political  Economy.  8:433-51.  September,  1900. 

Income  Tax  and  the  National  Revenues.     Max  West. 

The  desirability  of  an  income  tax  is  a  distinct  question;  but 
here  also  is  much  confusion  of  thought.  An  impression  seems 
to  prevail  that  there  is  some  peculiar  virtue  (or  vice)  in  an 
income  tax  vi'hich  makes  it,  even,  when  levied  at  a  proportional 
rate,  an  instrument  for  bringing  about  a  greater  equality  between 
the  rich  and  poor.  This  impression  is  due  largely,  no  doubt, 
to  the  very  generous  exemption  in  the  income-tax  law  of  1894 ; 
but  exemptions  are  equally  applicable  to  other  direct  taxes. 
The  fact  is  that  an  income  tax  is  no  more  favorable  to  the  poor 
than  many  other  forms  of  taxation.  Its  abstract  justice  is  de- 
feated by  its  practical  defects,  some  of  which  it  seems  impossible 
to  remedy.  It  falls  most  heavily  not  upon  the  largest  incomes, 
but  upon  those  whose  amount  can  be  least  readily  concealed. 
The  man  with  a  salary  cannot  escape ;  the  man  of  wealth  can, 
according  to  the  elasticity  of  his  own  conscience.  The  income 
tax  punishes  honesty  and  puts  a  premium  upon  perjury.  There 
is  nothing  in  the  nature  of  the  tax  which  makes  it  easier  to 
assess  justly  than  the  state  taxes  on  personal  property;  the 
superior  federal  administration  might  save  it  from  becoming  a 
farce  (as  the  still  better  administration  of  Prussia  makes  it  a 
partial  success),  but  could  never  make  it  operate  equally.  The 
comparative  success  of  the  Civil  War  income  tax  in  its  early 
years  was  due  chiefly  to  the  extraordinary  patriotism  of  the  war 
period,  which  would  not  even  question  the  constitutionality  of 
the  tax  as  long  as  the  war  continued.  As  soon  as  the  war  was 
over  the  receipts  suddenly  began  to  dwindle  away.  Even  the 
English  income  tax,  with  its  principle  of  taxing  each  constitu- 
ent part  of  income  at  its  source,  is  weak  in  one  of  its  most 
important  parts,  where  that  expedient  is  not  practicable. 


INCOME  TAX  ^^ 

Minneapolis  Journal.  October  6,  1909. 

Empire     of    Japan :     Japan's     Greatest     Problem. 
Frederick  J.  Haskin. 

The  fiscal  problem  in  Japan  is  to  provide  sufficient  money 
to  maintain  the  army  and  navy  and  to  constantly  increase  the 
latter;  to  pay  for  the  administration  of  affairs  in  Korea  and 
Manchuria;  to  meet  the  deficits  of  countless  business  concerns 
with  treasury  subventions ;  to  pay  the  subsidies  which  keep  the 
enormous  Japanese  merchant  marine  on  the  high  seas ;  to  main- 
tain the  most  extensive  and  expensive  diplomatic  and  consular 
service  in  the  world ;  to  finance  numberless  schemes  for  indus- 
trial development  and  business  exploitation  of  the  newly  acquired 
Japanese  "possessions"  on  the  mainland ;  and  to  meet  the  enor- 
mous obligation  of  a  huge  imperial  debt. 

The  people  from  whom  all  this  money  must  come  are  the 
poorest,  albeit  the  thriftiest,  on  earth.  The  arable  area  of  Japan, 
which  supports  a  population  of  50,000,000  people,  is  less  than  the 
area  of  West  Virginia.  If  every  human  being  in  the  United 
States,  Canada  and  Mexico  were  to  be  forcibly  removed  to  the 
state  of  Kansas,  then  Kansas  would  not  be  as  crowded  as  Japan 
is  today.  The  best  rice  in  the  world  is  grown  in  Japan,  and  rice- 
growing  is  the  chief  industry  of  the  nation.  Yet  the  farmers 
are  so  poor  that  they  cannot  eat  the  rice  they  grow.  They  must 
sell  it  and  then  buy  the  cheaper  grades  of  rice  from  French  Indo- 
China,  and  many  of  them  are  too  poor  even  for  that.  They 
must  subsist  upon  a  diet  of  boiled  millet  seeds,  with  a  feast  of 
fish  once  a  month.  The  average  amount  of  land  tilled  by  each 
family  is  a  trifle  less  than  two  acres.  The  agricultural  skill, 
the  unflagging  industry,  the  thrift,  the  patience  of  the  Japanese 
farmer  is  not  to  be  equaled  under  the  sun.  Yet  of  the  product 
of  that  tiny  farm,  hardly  big  enough  for  an  American  kitchen 
garden,  the  farmer  must  support  his  family,  which  is  never  small, 
and  he  must  give  of  his  produce  27  per  cent,  in  taxes  to  the 
imperial  government,  and  from  2  to  8  per  cent,  in  taxes  to  the 
local  government. 

There  are  some  prosperous  business  men  in  Japan,  some  few 


78  SELECTED  ARTICLES 

rich  men.  If  a  man's  income  reaches  the  amount  of  $50,000  a 
year,  he  must  pay  68  per  cent,  of  the  whole  to  the  government 
as  an  income  tax,  or  an  annual  tax  of  $34,000  out  of  $50,000. 
And  that  tax  is  not  based  upon  a  return  made  by  the  taxpayer, 
but  upon  an  estimate  made  by  the  secret  agents  of  the  govern- 
ment, in  a  land  where  the  secret  agents  know  every  secret.  There 
are  only  twenty-three  men  in  Japan  who  pay  taxes  on  an  in- 
come this  large.  But  the  income  tax  pursues,  in  a  descending 
scale,  the  man  in  every  walk  of  life,  down  to  an  annual  income  of 
$50.  And  the  very  poorest  must  pay  an  average  income  tax  of 
32  per  cent.  The  land  tax  in  cities  is  20  per  cent,  per  annum 
on  the  assessed  valuation.  The  assessment  is  made  at  about  50 
per  cent,  of  the  actual  value,  so  that  in  ten  years  the  owner  of 
city  real  estate  has  paid  in  taxes  the  full  value  of  his  property. 

These  enormous  taxes  are  paid  almost  without  complaint. 
Just  before  the  war  with  Russia  the  taxes  were  quadrupled  for 
war  purposes.  Patriotic  Japan  did  not  protest.  Just  after  the 
war  the  war  taxes  were  almost  doubled  again  for — what  pur- 
poses? Patriotic  Japan  endured  and  paid.  Patriotic  Japan  is 
still  enduring  and  paying,  and  there  is  no  prospect  that  the  tax- 
ation burden  will  be  lifted.  There  is  some  protest,  of  course. 
There  was  a  boycott  of  salt  as  a  result  of  the  government 
monopoly  increase  in  prices.  The  newspapers  have  inveighed 
against  higher  taxes,  but  their  protest  has  been  no  more  vigorous 
and  no  more  successful  than  the  campaign  for  taxation  reform 
in  the  American  press.  The  ministry  was  forced,  by  public 
opinion,  to  place  a  limit  upon  the  expenditures  of  the  navy  and 
army,  but  the  limit  is  quite  liberally  high. 

The  national  debt  of  Japan  approximates  $1,140,000,000 — a 
per  capita  indebtedness  of  $21.93,  more  than  twice  the  per  capita 
indebtedness  of  the  United  States.  The  Japanese  debt  repre- 
sents money  actually  borrowed  abroad  for  the  purpose  of  pushing 
forward  the  imperial  program.  The  American  debt  is  largely 
an  artificial  concern  kept  as  large  as  possible  to  enable  an  absurd- 
ly inadequate  banking  system  to  keep  up  an  inadequate  currency 
issue.  The  difiference  is  that  the  Japanese  debt  will  have  to  be 
paid  in  good  cold  cash,  and  the  collectors  are  now  busy  taking 
money  from  the  people  to  lay  up  against  the  day  of  reckoning. 


INXOME  TAX  79 

Moody's  Magazine.  3:331-3.  February,  1907. 

Inheritance  and  Income  Taxes.     M.  S.  Williams. 

In  the  first  place,  a  tax  is  levied  primarily  for  the  revenue 
it  will  yield.  Sometimes  taxes  are  levied  for  the  purposes  of  so- 
cial regulation.  When  levied  for  other  purposes  than  to  secure 
revenue,  two  things  must  be  shown:  first,  the  arguments  in  sup- 
port of  such  regulation  must  be  convincing,  and,  second,  it  must 
be  made  clear  that  such  social  regulation  will  be  realized  more 
effectively  and  economically  thru  the  imposition  of  a  tax  than 
thru  legislation  directed  immediately  to  the  purpose.  It  must  be 
shown,  also,  that  such  a  tax  will  not  bring  in  its  train  evils  which 
may  overtop  those  which  it  is  proposed  to  cure. 

Federal  Government  Does  Not  Need  More  Revenue. 

Criticism  of  the  president's  position  hinges  on  the  fact  that 
the  federal  and  state  governments  draw  their  revenues  ulti- 
mately from  the  same  source,  that  is,  from  the  earnings  of  the 
people.  All  that  goes  for  the  support  of  one  grade  of  government 
reduces  the  amount  available  for  the  support  of  the  other  grade. 
The  national  government  raises  its  $7  per  capita  with  little 
difficulty.  Its  revenues  are  nearly  always  in  excess  of  its  needs, 
even  when  liberally  administered.  While  this  is  true,  the  states 
and  local  divisions  are,  almost  everywhere,  struggling  along  with 
deficient  supplies.  If  we  want  to  hasten  the  process  of  subor- 
dinating the  states  and  expanding  the  powers  of  the  central 
authority  there  could  hardly  be  found  a  more  effective  means 
than  to  permit  Congress  to  encroach  upon  the  fiscal  domain  of 
the  states. 

•The  first  objection  to  the  proposed  measure,  therefore,  is  that 
the  federal  government  does  not  need  any  expansion  of  its 
revenue  basis,  while  the  need  of  greater  revenue  for  the  states 
is  most  imperative. 

Another  serious  defect  in  the  president's  plan  becomes  ap- 
parent when  we  consider  the  problem  of  administration.  The 
economical  collection  of  a  tax  requires  that  the  ta.x  be  one 
adapted    to   the   administrative   machinery   already   in    existence. 


8o  SELECTED   ARTICLES, 

If  this  governmental  organization  does  not  exist  it  must  be 
created  for  that  purpose  ;  such  modification  involves  expense,  so 
that  a  large  portion  of  the  tax  cannot  become  a  true  fiscal  re- 
source. Moreover,  if  the  necessary  adjustment  involves  the  dup- 
lication of  agencies  already  engaged  in  similar  work  in  another 
grade  of  government  the  waste  will  be  permanent. 

National  Sources  of  the  Federal  Revenue. 

The  federal  government  has  been,  from  the  first,  charged 
with  the  control  of  commerce  with  foreign  nations.  In  accord 
with  this  duty  we  have  an  extended  consular  system  devoted  to 
the  interests  of  our  foreign  commerce.  The  registry  of  vessels, 
the  improvement  of  harbors,  the  regulation  of  shipmasters  and 
pilots,  laws  relating  to  immigration,  naturalization,  and  the  rights 
of  aliens,  and  much  other  legislation  of  a  kindred  character, 
emanates  from  the  national  rather  than  from  the  state  govern- 
ments. As  an  incident  to  this  control  the  first  Congress  very 
properly  selected  imports  as  the  main  object  of  taxation  for 
federal  purposes,  and  from  that  day  to  the  present  import  duties 
have  formed  the  chief  source  of  federal  revenue. 

Suppose,  for  the  argument's  sake,  we  admit  that  the  central 
government  may  need  an  extension  of  its  revenue  basis,  and 
admit  also  that  taxes  on  inheritances  and  incomes  would  not 
impede  the  flow  of  revenue  to  the  states ;  the  question  still  re- 
mains whether  the  national  government  is  so  organized  as  to 
make  the  most  economical  use  of  such  taxes  or  whether  there 
may  not  be  more  appropriate  sources. 

In  answer  to  this  question  we  need  only  refer  again  to  the 
functions  of  the  federal  government.  Besides  having  juris- 
diction over  foreign  commerce :  Congress  is  charged  with 
the  regulation  of  trade  between  the  states.  Congress  is  already 
engaged  in  this  important  duty  and  is  supported  by  a  well-organ- 
ized division  of  the  executive  department  charged  with  ad- 
ministering such  regulative  acts.  A  tax,  or  a  series  of  taxes,  on 
interstate  commerce  would  involve  no  extension  of  federal  func- 
tions. If  federal  revenue  is  needed  this  resource  might  be 
utilized,  and  for  the  reasons  which  make  import  duties  so  highly 
appropriate. 


INXOME  TAX  8i 

The  whole  subject  of  property  rights,  contracts,  bequest  and 
inheritance  within  the  states,  are  under  control  of  the  states. 
There  is  nothing  in  the  federal  system  comparable  to  the  probate 
courts  of  the  states.  The  administration  of  taxes  on  inheri- 
tances whether  general,  collateral,  or  of  any  other  sort,  must 
naturally  develop  upon  the  courts  of  the  states,  and  any  extension 
of  federal  activities  in  this  field  would  involve  a  degree  of  inter- 
ference with  state  autonomy  which  is  wholly  incompatible  with 
our    traditional    views    regardng    the    distribution    of    functions. 

The  Tzi'o  Principal  Objections. 

The  two  objections  to  the  president's  proposal  are,  there- 
fore, first,  that  the  revenue  is  not  needed  and  any  revenue  thus 
collected  would  operate  to  the  loss  of  the  states ;  second,  that 
any  inheritance  tax  is  not  adapted  to  the  scope  of  federal  func- 
tions and  its  collection  would  not  only  be  uneconomical  but  would 
involve  a  serious  menace  to  state  autonomy. 

These  objections  both  apply  with  but  little  modification  to 
any  scheme  of  income  taxation  which  can  be  devised.  These 
objections  must  be  final,  not  against  the  taxes  per  se,  but  against 
their  imposition  by  the  central  government.  The  fact  that  such 
federal  taxes  have  been  collected  in  the  past  does  not  aflfect 
the  conclusion.  Neither  is  the  conclusion  afifected  by  the  fact 
that  a  constitutional  amendment  might  clear  away  certain  super- 
ficial defects  and  render  taxes  of  this  nature  more  equitable  than 
were  the  income  and  inheritance  taxes  of  the  past.  The  objec- 
tions that  have  been  raised  are  such  that  a  constitutional  amend- 
ment cannot  cure.  They  are  inherent  in  our  political  theory, 
when  once  that  is  analyzed  and  understood,  and  must  stand  until 
we  are  ready  for  the  complete  domination  of  the  national  govern- 
ment and  the  suppression  of  the  states. 


Nation.  26:  287.  May  2,   1878. 

Income  Tax  Here  and  in  England. 

Some  of  the  western  papers  have  undertaken  to  demonstrate 
the  expediency  of  the  income  tax  by  showing  its  success  as  a 


/ 


82  SELECTED  ARTICLES 

means  of  raising  revenue  in  England,  which  is  about  on  a  par 
with  the  argument  which  some  of  the  senatorial  group  use, 
that  General  Grant's  social  success  among  the  European  aristo- 
crats proves  that  he  merits  a  third  term.  In  the  first  place, 
the  income  tax  was  never  suggested  or  thought  of  in  England 
as  a  means  of  "striking"  one  class  or  district  in  order  to  spare 
another  class  or  district.  It  has  always  been  advocated  simply 
as  a  fiscal  scheme,  and  not  as  a  means  of  gratifying  social  preju- 
dices. The  most  unfortunate  feature  in  the  proposal  that  it 
should  be  revived  here  just  now  is,  that  it  is  part  and  parcel  of 
an  assault  on  that  portion  of  the  community  which  is  supposed 
to  be  in  possession  of  accumulated  property,  for  the  purpose 
of  relieving  another  portion  which  is  supposed  to  be  in  debt. 
It  is  a  sufficient,  and  indeed  fatal,  objection  to  any  tax  that  it 
has  originated  in  any  such  way,  and  there  is  no  doubt  that  it 
was  to  prevent  attacks  on  wealthy  localities  by  poorer  and  more 
populous  ones  that  the  Constitution  provided  that  no  "capitation 
or  other  direct  tax"  should  be  laid  except  in  proportion  to  popu- 
lation. 

The  purely  fiscal  origin  of  the  tax  there,  too,  has  made  its 
collection  efficient,  decent  and  inofifensive.  The  commissioners 
who  have  charge  of  it  are  sworn  to  secrecy.  The  returns  are 
as  secure  from  public  inspection  in  their  hands  as  if  locked  in 
the    taxpayer's    desk. 

The  strictly  fiscal  character  of  the  tax  irt  England  and  the 
strictly  confidential  mode  of  collection  make  the  use  of  it  as 
an  instrument  of  party  gain  or  political  annoyance  impossible. 
But  it  had  not  been  in  existence  very  long  before  a  couple  of 
political  partisans  of  the  lowest  order  were  sent  out  by  the 
treasury  to  act  as  itinerant  spies  to  ferret  out  cases  of  non- 
payment or  insufficient  payment,  and  they  began  incontinently,  as 
might  have  been  expected,  to  levy  "blackmail"  both  on  men  who 
had  made  incorrect  returns  purposely,  and  on  men  who  knew 
they  might  innocently  have  made  incorrect  returns  and  were 
frightened  by  the  possible  consequences  of  their  neglect  or  over- 
sight. 

It  must  be  observed,  also,  that  England  is,  par  excellence, 
the  country  of  fixed  incomes — that  is,  of  incomes  derived  from 


INCOME  TAX  83 

safe  investments.  The  number  of  persons  living  on  such  in- 
comes drawn  from  the  public  funds,  home  or  foreign,  from 
rent  charges,  from  mortgages,  from  farm  rents  and  railroad 
shares,  and  varying  little  if  any  from  year  to  year,  is  large 
in  proportion  to  the  number  of  those  who  draw  their  incomes 
from  what  we  call  "active  business,"  or  professional  gains,  to 
a  degree  of  which  Americans  have  little  idea.  England  is  a 
country  of  enormous  accumulated  capital  lent  out  in  every  di- 
rection all  over  the  world,  the  yield  of  which  supports  a  vast 
body  of  persons  in  complete  or  partial  leisure.  Among  us  this 
class  is  comparatively  very  small.  Nearly  every  American  is 
in  a  greater  or  less  degree  a  trader  or  speculator,  and  is  "turn- 
ing over"  his  capital,  if  he  has  any,  in  some  enterprise  of 
varying  degrees  of  profit.  The  sphere  of  an  income  tax  in 
England  is  accordingly  very  large,  and  the  making  of  returns 
very  simple.  Variations  in  a  man's  income  from  year  to  year 
are  comparatively  rare,  and  when  they  occur  are  comparatively 
easy  to  account  for  and  set  forth.  Here,  on  the  contrary,  the 
sphere  is  very  small,  as  is  shown  by  the  present  expectation 
of  the  west  and  south  that  they  will  escape  the  incidence  of 
the  tax  altogether,  and  by  the  ridiculous  fact  that  when  it  was 
levied,  and  incomes  under  $2,000  exempted,  it  was  only  paid 
by  150,000  persons  out  of  a  population  of  40,000,000.  The  sources 
from  which  an  American  who  has  more  than  $2,000  a  year  draws 
his  income  are  apt  to  be  various,  and  the  yield  of  each  to  change 
from  year  to  year  in  a  way  unknown  in  older,  more  cautious, 
and  less  enterprising  communities ;  and  this  not  only  makes  it 
hard  for  honest  men  to  make  accurate  returns,  but  makes  con- 
cealment or  evasion  easy  for  dishonest  men. 


Nation.  57:  404-5.  November  30,  1893. 

Proposed  Income  Tax. 

Such  a  tax  was  imposed  during  the  war,  and  it  was  con- 
tinued some  years  after  the  war,  while  the  national  finances 
were    in    an    unsettled   and    strained   condition.     As    soon    as    it 


84  SELECTED  ARTICLES 

was  found  that  the  tax  could  be  spared  without  danger  to  the 
pubHc  credit,  it  was  repealed,  but  this  proves  nothing  as  to 
the  rightfulness  or  the  fiscal  expediency  of  the  tax.  The  re- 
peal may  have  been  due  to  the  fact  that  the  classes  who  had 
to  pay  it  were  the  most  influential  at  Washington,  while  those 
who  did  not  have  to  pay  it  cared  nothing  about  it  one  way  or 
the  other.  Governments  generally  yield  to  the  strongest  pres- 
sure, and  this  may  have  been  the  case  with  regard  to  the  income 
tax.  The  idealogues  offered  little  resistance  to  the  repeal  at 
that  time.  In  fact,  the  amendments  that  had  been  engrafted  on 
the  tax  from  time  to  time  had  left  it  in  such  a  tattered  condition 
in  1872  that  it  yielded  little  more  than  the  cost  of  collection. 
Its  history  may  be  recited. 

It  was  first  enacted  in  1861,  and  the  rate  was  fixed  at  3  per 
cent,  on  all  incomes  over  $800.  No  machinery  existed  for  col- 
lecting it  and  before  any  had  been  provided  Congress  changed 
it.  Under  the  act  of  1862,  all  incomes  over  $600  and  under 
$5,000  were  taxed  5  per  cent.,  over  $5,000  and  under  $10,000 
7^  per  cent.,  over  $10,000  10  per  cent.  Certain  deductions  were 
allovced  in  estimating  income,  such  as  house  rent  actually  paid 
and  other  taxes  actually  paid,  whether  national,  state,  or  local. 
In  1864  a  special  tax  of  5  per  cent,  was  levied  for  one  year, 
this  being  additional  to  the  regular  income  tax.  In  the  same 
year  the  rate  was  raised  so  that  all  incomes  above  $5,000  paid 
10  per  cent.  In  1865  the  first  change  was  made  in  the  direction 
of  lowering  the  tax.  This  was  done  by  raising  the  exemption 
from  $600  to  $1,000,  and  making  the  tax  uniform  at  5  per  cent. 
In  1870  the  exemption  was  raised  to  $2,000  and  the  rate  re- 
duced to  2i^  per  cent.  In  addition  to  this  change  it  was  pro- 
vided that  all  business  losses  sustained  during  the  year,  and  all 
interest  paid  on  loans,  and  all  money  paid  for  labor  to  cultivate 
land  and  for  rent  and  repairs  of  premises  actually  occupied 
might  be  deducted  in  estimating  incomes.  Under  these  sweep- 
ing changes  the  revenue  derived  from  the  tax  fell  to  $19,000,000 
in  1871  and  to  $14,000,000  in  1872.  The  maximum  reached  in 
any  single  year  ($73,000,000)  was  in  1866.  This  was  the  year  of 
the  "double  income  tax" — the  year  in  which  the  bulk  of  the 
special  tax  enacted  in  1864  was  collected.     When  the  proceeds 


INCOME  TAX  85 

of  the  tax  had  fallen  below  $20,000,000,  it  was  deemed  useless 
to  continue  it  longer.  It  expired  in  1872,  and  it  was  believed 
then  that  no  occasion  short  of  a  war  of  great  magnitude  would 
ever  justify  its  reenactment. 

The  justice  of  an  income  tax  if  it  could  be  fairly  and  hon- 
estly collected  does  not  admit  of  doubt,  but  the  objections  to 
it  are  the  same  in  kind  as  those  which  lie  against  the  personal- 
property  tax.  It  cannot  be  collected  with  fairness  and  equality. 
The  taxpayer  must  cooperate  with  the  collector  in  order  to 
ascertain  the  income.  Consequently  only  the  very  conscientious 
people  pay  their  rightful  share.  The  practical  attempts  to 
collect  a  personal-property  tax  in  the  several  states  have  been 
uniformly  futile — the  amounts  realized  being  ever  on  a  dwindling 
scale.  There  is  no  reason  to  suppose  that  the  results  of  an 
income  tax  would  be  in  any  wise  different.  The  revenue  de- 
rived during  the  war  is  no  criterion  whatever.  "At  that  time 
the  taxpayers  generally  cooperated  with  the  collector  zealously. 
Public  opinion  compelled  them  to  do  so.  The  nation's  life 
was  at  stake.  Those  who  were  not  in  the  field  felt  a  double 
obligation  to  supply  the  means  to  support  those  who  were  there. 

No  such  conditions  exist  now.  Hence  there  is  every  prob- 
ability that  the  taxpayers  would  adopt  the  satiu.iia'4  """  ^"--•■■''f'. 
the  impost  that  they  employ  in  avoiding  the  personal-property 
tax  levied  by  the  states.  In  other  words,  the  tax  would  be  a 
vastly  unequal  one  in  practice,  its  burden  falling  chiefly  on  those 
who  were  too  honest  to  shirk  it. 


Nation.   71:   197.  September  6,   1900. 

English   Income  Tax. 

A  tax  on  income  was  levied  under  Pitt,  at  the  end  of  the 
last  century  (1798),  and  assumed  its  present  form  early  in 
this  century  (1803).  As  a  war  tax,  it  continued  to  be  levied 
until  the  end  of  the  Napoleonic  wars,  when  it  was  discontinued, 
to  be  revived  by  Sir  Robert  Peel,  in  1842,  "partly  to  provide 
for  a  deficit  in  the  budget,  and  partly  to  enable  him  to  make  cer- 


86  SELECTED  ARTICLES 

tain  reductions  and  reforms  in  the  complicated  system  of  pro- 
tective import  duties."  In  spite  of  "complaint  on  the  part  of 
taxpayers  and  adverse  criticism  by  statesmen,  politicians,  and 
writers  on  finance,"  and  in  spite  of  efforts  on  the  part  of  the 
early  chancellors  to  avoid  continuing  the  tax,  it  has  been  re- 
newed from  year  to  year  for  more  than  fifty  years,  the  rate 
being  adjusted  to  current  needs;  and  it  is  to-day,  "although 
still,  in  form,  a  temporary  tax,  requiring  for  its  continuance 
an  annual  renewal  by  act  of  Parliament,  in  all  probability  as 
firmly  established  and  as  permanent  as  any  part  of  the  revenue 
system."  The  tax  yielded  approximately  $90,000,000  in  the 
year  1898-99,  and  Dr.  Hill  is  led  to  observe,  regarding  it,  that, 
"besides  constituting  an  important  part  of  the  permanent  or 
ordinary  revenues,  the  tax  has  repeatedly  proved  to  be  a  val- 
uable resource  for  an  emergency;  through  its  instrumentality, 
more  than  one  chancellor  of  the  exchequer  under  conditions  of 
more  or  less  difficulty,  has  succeeded  in  maintaining  that  close 
adjustment  of  revenue  to  expenditure  which  the  excellent  tradi- 
tions of  the  English  system  of  finance  required  of  him." 

Although  the  general  principle  of  progression  is  nowhere 
recognized,  the  tax,  in  its  practical  working,  is,  in  consequence  of 
,^pr+o4.-o.-''_pt>.j^;^ava:ii'  and  exemptions  allowed,  progressive  on  all 
incomes  of  £700  or  less.  Incomes  of  £150  are  altogether  ex- 
empt from  taxation.  On  incomes  of  from  £150  to  £400,  an 
abatement  of  £160  is  allowed ;  and  on  incomes  of  £400  to  £500. 
an  abatement  of  £150;  £500  to  £600,  an  abatement  of  £120; 
£600  to  £700,  of  £70.  As  a  consequence  of  these  abatements  and 
exemptions,  a  tax  of  8d.  in  the  pound  is  graduated  on  incomes 
below  £700  by  an  easy  progression  from  complete  exemption  on 
incomes  below  £150  to  an  amount  equivalent  to  a  tax  of  3H  per 
cent,  on  the  total  income,  where  the  income  is  above  £700.  The 
allowance  of  exemptions  and  abatements  of  the  tax  on  small 
incomes  involves  a  knowledge  of  the  amount  of  the  tax  paid  by 
the  individual  as  well  as  of  the  amount  of  his  property  or  income. 
Under  any  system  of  indirect  taxation  the  amount  ultimately 
*paid  by  the  individual  cannot  be  determined  or  regulated;  and 
consequently  no  abatement  of  the  tax  can  be  made. 

The  obscurity  attaching  to  the  incidence  of  all  forms  of  in- 


INCOME  TAX  87 

direct  tax,  while  it  facilitates  the  payment  of  taxes  and  avoids 
friction,  has,  nevertheless,  one  unfortunate  consequence  in  that 
it  breeds  popular  indifference  to  the  action  of  legislative  bodies 
in  voting  away  public  monej-s  for  miscellaneous  purposes.  The 
cost  to  the  taxpayer  is  obscured  by  indirectness  in  the  assess- 
ment of  the  tax.  This  tendency  to  extravagance  is  one  of  the 
chief  dangers  attaching  to  indirect  forms  of  taxation.  It  is 
fostered  in  the  popular  indifference  regarding  the  employment 
of  public  revenues.  Considering  the  services  performed  by  his 
government,  an  American  pays  more  out  of  a  given  income  than 
he  would  have  to  pay  were  he  living  under  any  one  of  the 
European  governments.  He  delights  in  free,  extravagant,  even 
wasteful,  expenditures ;  delights  to  see  public  works  under- 
taken, wages  paid  freely  for  incompetent  service,  and  men  em- 
ployed in  great  numbers  as  needless  supernumeraries — because 
all  this  seems  to  occur  at  nobody's  expense.  An  equitable  as- 
sessment of  direct  taxes,  in  a  form  which  should  enable  each 
citizen  to  estimate  the  cost  to  him  individually  of  this  lavish- 
ness,  would  constitute  a  wholesome  check  upon  public  disburse- 
ments. The  taxpayer  needs  to  feel  that  he  ultimately  earns 
the  wages  paid  out  to  idle  supernumeraries  in  the  employ  of 
the  government.  If  the  tax  could  be  levied  upon  him  directly  in 
a  lump  sum  which  should  increase  with  the  extravagance  of 
the  government,  the  inconvenience  of  paying  it  would  undoubt- 
edly dissipate  his  indifference  to  its  amount,  and  so  arouse  in  him 
a  keen  interest  in  true  economy. 

In  England,  taxpayers  have  always  guarded  jealously  the 
right  of  the  government  to  assess  taxes  upon  them,  keeping  care- 
ful account  of  amounts  granted  to  the  Crown,  and  requiring 
careful  account  of  their  expenditure.  English  practice  and  ex- 
perience are  particularly  instructive  on  this  point.  There  is  no 
confusion  regarding  the  sources  of  public  revenues,  no  con- 
fusion of  taxpaying  with  subsidization  of  industry,  no  effort  to 
wield  the  tax-levying  power  as  a  means  of  disbursing  political 
favor,  or  as  a  means  of  keeping  wages  high.  These  notions 
have  been  outgrown.  The  English  taxpayer  regards  the  pay- 
ment of  a  tax  as  a  reduction  of  his  personal  income,  and  looks 
to   receive    an    account   of   its   expenditure. 


88  SELECTED   ARTICLES 

New   Englander.   54:  39-43.   January,    1891. 

Shall  We  Have  an  Income-Tax?     George  A.  Butler. 

Mr.  J.  S.  Mill,  who  has  contended  so  ably  for  the  soundness 
of  the  principle  of  an  income-tax,  says  that  the  amount  required 
for  the  necessaries  of  life,  say  one  hundred  pounds,  should  be 
exempt  from  taxation ;  that  necessaries  above  the  limit  fixed 
should  be  taxed  in  proportion  to  the  surplus  by  which  they  ex- 
ceed the  limit ;  that  all  sums  saved  from  income,  and  invested, 
should  be  exempt  from  the  tax ;  "or  if  this  be  found  impracti- 
cable, that  life  incomes  and  incomes  from  business  and  pro- 
fessions, should  be  less  heavily  taxed  than  inheritable  incomes, 
in  a  degree  as  nearly  as  possible  equivalent  to  the  increased 
need  of  economy  arising  from  their  terminable  character;  al- 
lowance being  also  made,  in  case  of  variable  incomes,  for  their 
precariousness."  He  defends  the  exemption  of  any  sum  from 
the  tax,  only  on  the  ground  that  almost  all  the  indirect  taxes 
press  more  heavily  on  incomes  between  £50  and  ii50. 


North  American  Review.  130:  236-46.  March,  1880. 

Communism  of  a   Discriminating   Income-Tax. 
David  Ames  Wells. 

All  modern  systems  of  income  taxation  have  recognized  the 
principle  of  discriminating  in  favor  of  persons  in  the  receipt  of 
comparatively  small  incomes ;  and  have  provided,  as  a  fundamen- 
tal feature  of  their  policy,  that  all  incomes  below  a  certain  sum 
(usually  a  small  amount)  should  be  exempted  from  assessment. 
Thus,  for  example,  the  existing  income-tax  of  Great  Britain 
commences  with  its  assessment  on  incomes  of  £150  ($750)  and 
upward,  and  exempts  all  incomes  of  a  smaller  amount.  In 
Germany,  the  income  exemption  being  very  small,  nearly  the 
whole  population  of  the  country,  male  and  female,  are  made  sub- 
ject to  the  provisions  of  the  income-tax.  All  incomes  subject 
to    taxation    in    any    European    country   are    invariably   assessed 


IX' COME  TAX  89 

at  one  and  the  same  rate.  In  the  United  States,  on  the  other 
hand,  the  income-tax,  as  first  enacted  in  1863,  exempted  $600 
annual  income  for  each  person,  together  with  whatever  was 
paid  annually  for  rent  and  repairs  of  residence.  Five  per  cent, 
per  annum  was  then  levied  on  all  incomes  above  $600  and  not 
in  excess  of  $5,000;  seven  per  cent,  on  all  incomes  above  $5,000 
and  not  in  excess  of  $10,000;  and  ten  per  cent,  on  all  incomes  in 
excess  of  $10,000.  In  the  income-tax  of  the  United  States 
as  it  existed  at  one  period,  there  was,  therefore,  recognized 
the  principle,  not  only  of  exempting  incomes  below  a  certain 
amount  from  all  taxation,  which  amount,  in  order  to  keep  up  an 
appearance  of  equity,  was  allowed  to  be  equally  deducted  from 
all  larger  incomes ;  but,  in  addition,  the  further  one — not  recog- 
nized in  any  other  existing  income-tax — of  graduating  the 
assessment  by  increasing  the  rate  or  percentage  of  taxation 
on  the  larger  incomes.  This  system  was  accordingly  exceptional 
and  peculiar;  but  as  on  first  presentation  and  superficial  exam- 
ination it  seems  to  embody  an  ingenious  and  equitable  method 
of  equalizing  the  burdens  of  the  state  between  the  rich  and 
the  poor,  and  also  finds  special  favor  with  persons  of  a  com- 
munistic turn  of  mind,  by  whom,  with  the  di.scriminations  largely 
increased,  it  is  frequently  recommended  for  reenactment,  it  is 
proposed  in  the  interests  of  political  and  economic  science  to 
here  subject  it  to  analysis,  with  a  view  to  determine  whether 
any  income-tax,  which  discriminates  in  any  degree,  is  likely,  as 
is  often  claimed,  to  constitute  the  one  perfect  form  of  taxation 
of  the  future.  And,  at  the  outset,  attention  is  asked  to  the  fol- 
lowing proposition  : 

/Itty  Income   Tax   Which  Permits  of  any  Exemption   Whatever 
is  a  Graduated  Income-Tax. 

Any  form  of  income-tax  which  permits  of  exemption  is 
graduated,  not  by  the  rate  of  the  tax,  but  by  the  amount  of 
tTie  exemption,  which  is  equally  effective  in  producing  discrim- 
ination and  inequality,  because  all  incomes  below  an  arbitrary 
line  are  entirely  exempt  from  the  tax.  Again,  in  treating  of  an 
income-tax,    it    should    be    always    borne    in    mind    that,   when   a 


jQO  SELECTED  ARTICLES 

government  taxes  the  income  of  property,  it  in  reality  taxes 
the  property  from  which  the  income  is  derived.  In  England 
and  on  the  continent  of  Europe  land  is  taxed  on  its  yearly  rev- 
enue or  income  value,  and  these  taxes  are  always  considered 
as  land-taxes.  Alexander  Hamilton,  in  discussing  the  taxation 
of  incomes  derived  directly  from  property,  used  this  language : 
"What,  in  fact,  is  property  but  a  fiction,  without  the  beneficial 
use  of  it?  In  many  instances,  indeed,  the  income  is  the  property 
itself."     (Hamilton's  "Works,"  vol.  iii.,  p.  523.) 

If  the  law  exempts  from  taxation  income  from  property  to  the 
extent  of  $2,000,  it  in  effect  exempts  property  of  the  capital 
value  of  $50,000  from  taxation ;  for  at  present  four  per  cent,  is 
about  the  average  profit  of  money,  land,  or  other  property,  over 
and  above  all  charge  and  taxes ;  and,  at  that  rate  of  profit, 
$2,000  will  be  the  annual  income  value  of  $50,000.  Furthermore, 
if  we  assume  that  the  annual  income  of  realized  property  is 
four  per  cent.,  that  the  exemption  to  each  person  is  $2,000,  and 
that  the  rate  of  the  tax  is  five  per  cent.,  then  a  person  who  owns 
only  $50,000  in  value  of  property  will  pay  no  tax ;  he  who  owns 
$60,000  in  capital  value  of  like  property  will  pay  on  its  entire 
income  1.2  per  cent.,  or  five  per  cent,  on  the  income  of  the 
capital  value  in  excess  of  $50,000;  he  who  owns  $100,000  of 
property  will  pay  on  its  income  2^  per  cent. ;  while  he  who 
owns  $250,000  of  property  will  pay  on  its  income  four  per  cent., 
and  thus  the  tax  will  be,  in  effect,  graduated  in  rate  and  con- 
tinually approximating,  but  never  quite  reaching  a  rate  of  five 
per  cent. — the  property  paying  income  being  assumed  to  be  al- 
ways of  the  same  and  competing  class.  In  the  case  of  the 
recent  income-tax  of  the  United  States,  the  number  of  persons 
who  paid  this  tax,  when  the  exemption  (in  1868)  was  $1,000, 
was  259,385 ;  and,  when  the  amount  of  exemption  was  raised 
to  $2,000,  the  number  of  taxable  persons  was  reduced  to  116,000, 
and  subsequently  ran  down  to  71,000  out  of  a  total  population  of 
about  40,000,000.  Experience,  therefore,  demonstrates  that  an 
exemption  in  the  United  States  of  $2,000  of  income,  accredited 
to  each  individual  owner  of  property,  will  exempt  more  than 
nine  tenths  of  the  entire  property  of  this  country  and  tnore 
than  ninety-nine  hundredths  of   the  property-owners   from  this 


INCOME  TAX  91 

tax.  Under  such  circumstances,  it  is  a  misnomer  to  call  such 
an  exaction  taxation.  It  is  unmasked  confiscation,  and  a  bur- 
lesque on  taxation.  Nor  can  an  income-tax  which  exempts 
$2,000  of  income  be  defended  under  any  rule  or  doctrine  of 
de  minimis,  or  rejection  of  fractions,  for  the  property  and  in- 
come exempted  are  infinitely  greater  in  the  aggregate  than  the 
property  and  income  of  the  same  class  made  subject  to  the  tax. 
Under  this  form  of  an  income-tax  there  can  be  no  equality 
between  taxed  producers  and  untaxed  producers,  and  more 
especially  as  the  untaxed  producers  will  be  the  most  numerous, 
and  the  greatest  producers  in  quantity  as  a  body.  Xo  man  is 
a  free  man  the  fruits  of  whose  industry  and  capital  are  sub- 
ject to  surcharged  (overburdened)  exactions  to  an  unlimited 
degree,  and  from  which  his  immediate  competitors  are  entirely 
exempt.  Equality  of  taxation  of  all  persons  and  property 
brought  into  open  competition  under  like  circumstances  is  nec- 
essary, to  produce  equality  of  condition  for  all,  in  all  produc- 
tion, and  in  all  the  enjoyments  of  life,  liberty,  and  property. 
Any  government,  whatever  name  it  may  assume,  is  a  despotism, 
and  commits  acts  of  flagrant  spoliation,  if  it  grants  exemptions 
or  exacts  a  greater  or  less  rate  of  tax  from  one  man  than  from 
another  man  on  account  of  his  owning  or  having  in  his  pos- 
session more  or  less  of  the  same  class  of  property  which  is 
the  subject  of  the  tax.  M.  Thiers,  in  his  work  on  the  "Rights 
of  Property,"  thus  forcibly  condemns  confiscation  under  the 
name  and  form  of  a  graduated  income-tax:  "Proportionality," 
he  says,  "is  a  principle,  but  progression  is  a  hateful  despotism. 
.  .  .  To  exact  a  tenth  from  one,  a  fifth  from  another,  and  a 
third  from  another  is  pure  despotism — it  is  robbery."  If  it 
were  proposed  to  levy  a  tax  of  S  per  cent,  on  annual  incomes 
below  $2,000  in  amount,  and  to  exempt  all  incomes  above  that 
sum,  the  unequal  and  discriminating  character  of  the  exemp- 
tion would  be  at  once  apparent ;  and  yet  an  income-tax  ex- 
empting all  incomes  below  $2,000  is  equally  unjust  and  dis- 
criminating. In  either  case  the  exemption  can  not  be  founded 
or  defended  on  any  sound  principles  of  free  constitutional 
government.  It  is  a  simple  manifestation  of  tyrannical  power, 
under  whatever  form  of  government  it  may  be  enforced. 


92  SELECTED  ARTICLES 

A  Graduated  Income-Tax,  to  the  Extent  of  its  Discrimination, 
is  an  Act  of  Confiscation. 

The  federal  Constitution  further  provides  that  private  prop- 
erty shall  not  be  taken  for  public  use  except  upon  compensa- 
tion. It  is  conceded  that  this  is  a  limitation  on  the  power  of 
Congress.  There  must  be  a  line  between  the  taking  of  private 
property  for  public  use  and  taxation ;  but  how  can  that  line  be 
drawn  except  by  the  rule  that  taxation  means  uniformity  of 
burden  on  competing  avocations  and  competing  property?  A 
recent  decision  of  the  Supreme  Court  of  New  Jersey  seems  to 
be  direct  upon  the  unconstitutionalitj'  of  discriminating  bur- 
dens on  the  same  class  of  persons  or  property.  Thus  the  New 
Jersey  Court  said :  "A  tax  upon  the  person  or  property  of  A, 
B,  and  C,  individually,  whether  designated  by  name,  or  in  any 
other  way,  which  is  in  excess  of  an  equal  apportionment  among 
the  persons  or  property  of  the  class  of  persons  or  kind  of  prop- 
erty subject  to  the  taxation,  is,  to  the  extent  of  such  excess, 
the  taking  of  private  property  for  a  public  use  without  com- 
pensation. The  process  is  one  of  confiscation  and  not  of  taxa- 
tion." ("Township  Committee  of  Reading,"  36  N.  J.,  p.  66, 
1872;  see  also  "Cooley's  Constitutional  Limitations,"  §§  490-515; 
"Durach's  Appeals ;  62  Pennsylvania  State  Reports.") 

It  only  remains,  to  complete  this  argument,  to  consider  what 
is  meant  by  property  of  the  same  class.  The  answer  to  this 
is,  obviously,  property  which  immediately  or  directly  competes 
in  open  market.  The  force  of  competition  is  not  dependent 
upon  the  quantity  owned  or  produced  by  few  or  many  persons, 
but  upon  the  aggregate  quantity  of  similar  property  offered  in 
market,  whether  produced  or  owned  by  few  or  many  persons. 

It  may  also  be  pertinent  in  conclusion  to  say  that  two  thou- 
sand dollars  is  a  larger  exemption  than  has  ever  been  allowed 
in  any  income-tax  system  in  any  country  except  the  United 
States;  where  owing  to  comparative  equality  of  fortunes,  the 
exemption,  if  any  exemption  is  to  be  permitted,  should  be  ex- 
tremely low.  Wherever  the  line  of  exemption  may  be  drawn, 
an  act  of  discrimination  is  instituted  against  all  those  who  own 
property  producing  income  in  excess  of  the  line  of  the  exemp- 


INCOME  TAX  93 

tion.  In  England,  where  business,  to  a  greater  extent  than  in 
any  other  country,  is  conducted  by  large  capitalists,  where  the 
soil  is  owned  by  a  comparatively  few  persons,  and  where  the 
entire  property  of  the  nation  is  greatly  concentrated,  an  exemp- 
tion of  seven  hundred  and  fifty  dollars,  under  the  income-tax 
there  allowed  to  each  person,  is  of  much  less  practical  import- 
ance than  a  similar  exemption  would  be  in  the  United  States, 
where  it  would  remove  a  large  portion  of  all  incomes  derived 
from  property  from  the  burden  of  the  tax.  In  France,  owing 
to  the  very  great  and  minute  subdivisions  of  the  ownership  of 
the  soil,  a  small  exemption  would  also  take  from  the  income 
list  a  large  proportion  of  the  owners  of  real  estate  in  that  coun- 
try. Leroy  Beaulieu,  indeed,  estimates  that  an  exemption  of 
twenty-five  hundred  francs  (five  hundred  dollars)  would  ex- 
empt from  three  fourths  to  four  fifths  of  the  entire  income  of 
France;  and  accordingly,  when  in  1848  the  enactment  of  an 
income-tax  was  debated  in  France,  it  was  proposed  to  put  the 
exemption  as  low  as  two  hundred  and  fifty  francs,  or  fifty 
dollars.  Any  judicious  system  of  taxation  in  any  country  will 
have  reference  to  its  natural  products;  its  extent  of  territory; 
its  contiguity  to  competing  nations ;  the  density  or  sparseness 
of  its  population,  the  habits  of  the  people,  and  the  comparative 
equality  of  their  fortunes.  The  United  States  can  conven- 
iently, economically,  and  uniformly  collect  its  revenues  from  a 
few  domestic  articles,  like  whisky  and  tobacco,  manufactured 
in  large  amounts  at  one  place  by  one  person  or  firm;  and  on 
imports,  like  sugar,  tea.  and  cofYee,  introduced  into  the  country, 
to  a  great  extent,  in  large  vessels  and  in  large  quantities  at 
a  few  ports.  With  the  limitation  of  our  revenues  to  such  few 
sources,  economy  of  assessment  and  collection  will  be  insured, 
unnecessary  inquisition  and  loss  of  time — a  form  of  unpro- 
ductive taxation — will  be  avoided,  and  only  a  comparatively 
few  persons  will  feel  the  direct  hand  of  the  tax-gatherer;  while 
all  will  cheerfully  pay  taxes  in  regulated  prices  on  their  expense 
and  consumption,  where,  by  the  operation  of  natural  laws,  all 
taxation    must    finally    rest. 

But    any    attempt    to   collect    an    income-tax,    which    is    equal 
and  has  none  of  the  features  of  spoliation  or  confiscation,  from 


94 


SELECTED  ARTICLES 


our  sparse  population,  extending  from  Florida  to  Alaska,  is  en- 
tirely unpractical;  and,  unless  the  rate  is  excessive,  the  taxes 
received  would  not  pay  the  cost  of  assessment  and  collection, 
while,  as  before  shown,  the  rights  of  property,  the  great  repub- 
lican principle  of  equality  before  the  law,  and  constitutional 
law  itself,  will  alike  preclude  any  exemption  of  any  income  de- 
rived from  like  property.  It  is  a  vital  and  constitutional  ques- 
tion, demanding  absolute  equality,  that  is  here  involved  and  at 
stake.  Any  exemption  whatever,  small  or  great,  except  to  the 
absolutely  indigent,  is  purely  arbitrary;  and  the  principle,  once 
allowed,  may  obviously  be  carried  to  any  extent.  Any  exemp- 
tion of  any  portion  of  the  same  class  of  property  or  incomes 
is  an  act  of  charity  which  every  American  ought  to  reject  upon 
principle  and  with  scorn,  except  under  circumstances  of  great 
want  and  destitution.  Equality  and  manhood,  therefore,  demand 
and  require  uniformity  of  burden  in  whatever  is  the  subject  of 
taxation. 


North  American   Review.    158:    1-7.  January,  1894. 

Income  Tax  on  Corporations.     William  L.  Wilson. 

The  theory  of  the  income  tax  is  a  just  theory,  and  has  the 
approval  of  leading  economical  writers.  Its  trial  in  this  coun- 
try throws  little  light  upon  its  practical  operation,  for  it  lived 
too  short  a  time,  and  was  too  often  changed  to  become  a  famil- 
iar and  workable  part  of  our  fiscal  system.  Its  early  repeal 
was  carried  by  a  very  narrow  margin  in  both  houses,  which 
would  not  imply  that  it  was  specially  unpopular.  Senator  Sher- 
man was  among  these  stoutly  opposing  this  repeal.  In  a  speech 
made  in  the  Senate  in  May,  1870,  he  declared  it  "the  most  jifst 
and  equitable  tax  that  is  now  levied  in  the  United  States  of 
America,  without  exception."  Equally  strong  words  of  ap- 
proval were  spoken  in  the  House  by  General  Hawley,  of  Con- 
necticut, and  Mr.  Kerr,  of  Indiana. 

The  place  of  the  income  tax  in  the  English  system  has  been 
stated  by  Mr.  Noble,  in  his  "National  Finance,"  as  follows : 


INCOME  TAX  95 


"The  enormous  service  which  it  has  rendered  in  the  liberation 
of  trade  from  a  multitude  of  onerous  and  oppressive  burdens  has 
been  already  referred  to;  its  existence  has  rendered  possible  the 
great  reform  of  our  system  of  indirect  taxation  which  has  been  the 
foundation  of  our  modern  commercial  progress.  It  has  tlie  tran- 
scendent merit  over  duties  of  customs  and  excise,  that  it  does  not 
interfere  with  the  processes  of  industry  or  the  course  of  trade,  and 
that  the  whole  amount  which  it  costs  the  taxpayer  is  devoted  to 
the  service  of  the  state.  It  is,  at  present,  almost  the  only  impost 
by  means  of  which  any  substantial  contribution  is  levied  from  the 
increasing  wealth  of  the  country;  and  its  repeal  without  any  effect- 
ive substitute  would  aggravate  the  pressure  of  taxation  upon  those 
classes  which  are  least  able  to  bear  the  burden.  It  has  its  inequal- 
ities, but  they  are  by  no  means  so  flagrant  and  unjust  as  the  in- 
equalities  of   indirect   taxation." 

But  despite  these  strong  arguments  in  favor  of  an  individual 
income  tax,  and  the  unquestionable  equity  of  its  general  theory, 
there  are  very  grave  counter-reasons  which  rise  up  before  a 
legislature  who  seeks  to  embody  it  into  our  federal  tax  system. 
Aside  from  the  very  natural  objection  of  those  who  might  have 
to  pay  such  a  tax,  its  administration  is  necessarily  accompanied 
by  some  exasperating  and  some  demoralizing  incidents.  Our 
people  have  so  long  and  so  generally  been  free  from  any  public 
scrutiny  into  their  personal  incomes  and  even  from  any  person- 
al contact  with  federal  tax  collectors,  that  they  resent  the  ap- 
proach of  either.  Moreover,  like  the  personal  property  tax, 
which  is  so  universally  evaded,  a  personal  income  tax  would 
easily  lend  itself  to  fraud,  concealment,  and  perjury,  and  prove, 
as  Mr.  Mill  said,  a  tax  upon  conscience.  And  finally,  in  a  coun- 
try of  the  large  geographical  dimensions  of  the  United  States, 
it  would  be  difficult  to  put  into  smooth  and  effective  working 
order  the  necessary  machinery  for  its  thorough  collection. 

It  is  not,  in  my  judgment,  however,  liable  to  the  charge  that 
it  is  class  taxation.  Taxes  upon  consumption  are  taxes  upon 
the  poor,  and  it  is  one  of  the  capital  enormities  of  our  present 
tariff  laws  that  they  place  the  chief  burden  of  supporting  the 
federal  government  and  of  paying  pensions  upon  the  labor  of 
the  country.  The  balance  of  taxation  ought  to  be  weighted  by 
some  taxes  drawn  from  the  property  of  the  country. 


g6  SELECTED   ARTICLES 

North  American  Review.  190:  615-27.  November,  1909. 

Relations  of  State  and  Federal  Finance.    Edwin  R.  A.  Seligman. 

If  there  is  anything  that  may  be  considered  a  virell-settled 
induction  from  experience,  it  is  that  an  income  tax  is  more 
and  more  unsuccessful  as  the  basis  of  the  tax  becomes  nar- 
rower. In  former  times  a  local  income  tax  was  fairly  workable 
because  incomes  were  chiefly  local  in  their  nature.  In  modern 
times,  however,  the  income  of  the  taxpayer,  and  especially  the 
income  of  the  larger  taxpayer,  has  very  little  to  do  with  the 
locality  in  which  he  happens  to  live.  Nay,  more,  incomes  nowa- 
days, through  the  working  out  of  economic  forces,  have  be- 
come national  and  international  in  character  and  at  all  events 
have  far  transcended  state  lines.  A  man  may  live  in  one  state 
and  may  secure  his  income  partly  from  real-estate  holdings 
situate  in  another  state  and  partly  from  investments  in  securi- 
ties of  corporations  whose  earnings  are  derived  in  many  other 
states.  How  is  it  possible  for  any  local  or  state  administration 
successfully  to  ascertain  or  adequately  to  control  such  income 
of  its  resident  citizens?  The  state  income  taxes  in  the  United 
States  are  largely  for  that  reason  the  veriest  farces,  and  under 
present  economic  conditions  can  never  become  anything  else. 
If  we  are  to  have  an  income  tax  of  any  kind  that  is  at  all  in 
consonance  with  fiscal  principles,  it  must  obviously  be  a  federal 
income  tax  rather  than  a  state  income  tax.  For  in  no  other 
practicable  way  shall  we  be  enabled  to  avoid  the  numberless 
complications  of  interstate  double  taxation  which  would  assur- 
edly render  nugatory  any  attempt  to  introduce  a  state  income 
tax. 

So  far  as  considerations  of  revenue  are  concerned,  it  can 
scarcely  be  contested  that  the  income  tax  is  unnecessary  for 
federal  purposes.  Federal  revenues  in  the  past  have  in  normal 
times  been  derived  almost  entirely  from  custom  duties  and  in- 
ternal indirect  taxes.  There  is  no  reason  why  these  sources 
should  not  suffice  for  the  future.  Without  entering  here  upon 
the  general  question  of  the  protective  tariff,  it  may  be  con- 
fidently  asserted  that   we   can   continue   to   secure   a   large   and 


INCOME  TAX  97 

growing  revenue  from  import  duties  whether  the  principle  of 
protection  be  upheld  in  its  integrity  or  not.  Either  a  revenue 
tariff  with  incidental  protection  or  a  protective  tariff  with  in- 
cidental revenue  can  be  made  to  yield  the  desired  income.  And 
when  we  consider  the  immense  population  in  the  United  States, 
it  is  beyond  all  question  that  even  a  simple  system  of  indirect 
taxes  will  suffice  to  raise  the  remainder  of  the  needed  revenue. 
The  internal  revenue,  exclusive  of  the  income  tax,  yielded  at 
the  close  of  the  Civil  War  almost  $300,000,000  a  year,  and  if  we 
take  into  account  the  prodigious  increase  in  wealth  and  in  coh- 
sumption  during  the  forty  years  that  have  elapsed,  it  will  be 
apparent  that  the  internal  revenue  system  of  the  United  States 
might  be  made  to  yield  to-day  many  hundred  millions  of  dol- 
lars more  than  it  actually  does  without  even  approaching  the 
number  of  taxes  or  the  rate  of  taxation  that  existed  during  the 
Civil  War.  It  is  quite  safe  to  say  that  so  far  as  we  can  look 
into  the  future  the  prospective  expenditure  of  the  United  States 
may  be  readily  and  easily  supplied  by  import  duties  together 
with  a  well-chosen  system  of  light  internal  revenue  taxes. 

^  national  income  tax,  therefore,  is  not  needed  for  revenue 
purposes.  Nor  is  the  demand  for  a  national  income  tax  based 
upon  such  reasons.  The  argument  in  its  favor,  however,  is  none 
the  less  exceedingly  strong.  If  not  needed  for  revenue,  it  is 
needed  for  justice.  This  is  due  to  the  complete  breakdown  of 
the  general  property  tax  in  state  and  local  finance.  Under  the 
existing  state  and  local  systems  there  is  no  doubt  that  we  are 
unable  to  reach  the  possessors  of  large  fortunes.  The  wealthy 
man  stands  from  under,  not  necessarily  because  he  commits  per- 
jury, but  because  the  loopholes  in  the  general  property  tax  have 
become  so  numerous  that  any  adroit  individual  can  avail  himself 
of  them.  A  federal  income  tax  is  justifiable  on  the  score  of 
equity  under  prevalent  American  conditions^ 

I  would  here,  however,  sound  a  note  of  warning.  It  must 
not  be  imagined  that  a  federal  income  tax  would  at  once  work 
well.  The  experience  of  Germany  and  even  of  England  must 
not  lead  us  astray.  We  have  neither  the  administrative  ma- 
chinery of  Prussia  nor  the  methods  of  doing  business  which  arc 
found  in  Great  Britain.    The  lump-sum,  or  direct,  income  tax  of 


98  SELECTED  ARTICLES 

Prussia  would  be  hopeless  in  this  country ;  the  schedule,  or  in- 
direct, income  tax  of  Great  Britain  would  meet  with  great  diffi- 
culties in  its  application  here.  It  has  taken  England  half  a  cen- 
tury to  work  out  the  problem  of  its  income  tax  and  to  make  it 
fairly  successful.  It  would  take  us,  perhaps,  almost  as  long  to 
make  even  a  federal  income  tax  an  administrative  success.  Thus 
those  who  hope  for  a  fiscal  or  a  social  panacea  in  the  federal 
income  tax  are  bound  to  be  woefully  disappointed.  Moreover,  if 
introduced  into  this  country,  an  income  tax  measure  must  be 
framed  with  the  most  extreme  care  on  the  lines  far  dififerent 
from  those  of  1862  and  1894. 

One  final  advantage  of  the  federal  income  tax  which  must 
not  be  overlooked  is  that  it  would  render  far  easier  the  struggle 
that  is  going  on  in  our  various  states  to  amend  or  to  abolish  the 
iniquitous  personal  property  tax.  The  taxation  of  intangible  per- 
sonalty has  become  a  byword  and  a  reproach  to  our  American 
public  life.  All  efforts  to  reform  the  system  of  the  general 
property  tax  have  thus  far  shattered  against  the  rock  of  popular 
conviction  that  such  wealth  as  consists  of  personal  property 
ought  not  to  be  allowed  to  escape.  If  now  we  were  to  have  a 
federal  income  tax,  however  unsuccessful  it  might  be  at  first,  it 
would  take  the  wind  out  of  the  sails  of  these  objectors;  and  the 
would-be  reformers  of  the  system  of  local  and  state  taxation 
would  no  longer  be  met  by  the  contention  that  personal  property 
must  be  listed  for  taxation.  For  personal  property  would  then 
be  reached  through  the  federal  income  tax.  It  is  most  significant 
that  in  Great  Britain  personal  property  was  entirely  exempted 
from  all  local  taxation  in  the  very  same  decade  that  the  national 
income  tax  was  imposed. 

Our  conclusion  would  then  be  that  so  far  as  the  income  tax 
is  concerned,  even  though  it  be  not  needed  for  purposes  of  rev- 
enue, it  is  nevertheless  a  desirable  adjunct  to  our  scheme  of  fed- 
eral taxation.  It  goes,  of  course,  without  saying  that  even  apart 
from  this  question  the  projected  constitutional  movement,  legal- 
izing the  income  tax,  ought  to  prevail.  For  even  if  the  income 
tax  were  not  to  constitute  a  part  of  our  normal  revenue  system, 
it  would  be  deplorable  in  the  extreme  if  a  mighty  empire  like 
the  United  States  were  unable  to  use  this  potent  engine  of  rev- 
enue  in   time   of  need. 


INCOME  TAX  99 

Outlook.  85:    503-8.  March  2.  1907. 

Income  Tax :    A  Study  of  its  Advantages  and  Disadvantages  as 
a  Form  of  Federal  Taxation.     Philip  S.  Post. 

The  income  tax :  Is  it  the  fairest  and  most  equitable  tax  ever 
devised,  or  is  it  the  most  odious  and  generally  condemned  mode 
of  taxation  resorted  to  by  any  nation? 

Twice  Congress  has  enacted  an  income  tax,  the  first  in  1862, 
and  again  in  1894.  The  act  of  1862  was  a  war  measure,  passed 
at  a  time  when  Congress  was  seeking  to  drain  every  available 
spring  of  national  revenue.  With  the  public  mind  engrossed 
with  the  fate  of  armies,  the  tax  was  adopted  without  any  wide- 
spread discussion.  Its  constitutionality  was  upheld,  the  Supreme 
Court  perhaps  unconsciously  feeling  the  imperious  demand  of 
the  war  that  in  no  wise  should  the  arm  of  the  government  be 
weakened.  The  rates  varied  from  three  to  ten  per  cent.  The 
law  was  repealed  in   1871. 

On  August  18,  1894,  Congress  again  enacted  an  income  tax. 
Before  it  had  become  generally  operative,  the  Supreme  Court,  by 
a  vote  of  five  justices  to  four,  declared  the  law  unconstitutional. 
It  is  noteworthy  that  its  enactment  had  not  been  preceded  by 
any  general  debate  among  the  voters.  The  income  tax  was  not 
an  issue  in  the  campaign  of  1892,  and  the  country  had  no  serious 
reason  for  anticipating  that  the  Congress  then  being  elected 
would  enact  such  a  statute.  The  public  interest  awakened  by  its 
passage  soon  died  away,  the  adverse  decision  of  the  Supreme 
Court  having  apparently  removed  the  question  from  the  realm 
of  national  politics.  To  this  place  it  has  been  reinstated  by  the 
recommendations  contained  in  President  Roosevelt's  annual 
message. 

If  the  United  States  is  again  to  adopt  the  income  tax,  it  is 
most  desirable  that  Congressional  action  should  be  preceded  by 
a  full  and  thorough  popular  debate  as  to  its  merits.  This  is 
dcsiral)le  with  respect  to  all  important  cnaclnients.  It  is  pecu- 
liarly true  as  to  this  proposed  tax,  which,  more  than  any  other 
tax   known    to  governments,   requires    for   its    success    and    effi- 


100  SELECTED   ARTICLES 

ciency  the  support  of  a  well-informed  and  thoroughly  convinced 
public    opinion. 

It  has  seemed  fitting,  therefore,  to  present  a  study  of  the 
advantages  and  disadvantages  incident  to  this  form  of  taxation. 

The  advantages.  The  income  tax,  say  its  advocates,  is  "the 
fairest  and  most  equitable  tax  ever  devised."  In  the  earliest 
times  taxation  lacked  equality.  A  tax  was  either  a  gift  regu- 
lated by  the  generosity  and  loyalty  of  the  members  of  the  clan, 
or  an  extortion  limited  only  by  the  power  and  rapacity  of  the 
ruler.  Through  the  rude  equity  of  the  poll  tax,  falling  alike  upon 
every  male  subject,  by  successive  stages  more  equitable  stand- 
ards have  been  reached,  until  there  is  now  a  general  acceptance 
of  the  maxim  that  income  is  the  most  equitable  test  by  which 
to  measure  the  amount  that  the  citizen  ought  to  contribute  to 
the  support  of  the  government  that  shelters  him.  "To  arrange 
a  system  of  taxation  which  shall  correspond  as  closely  as  pos- 
sible to  the  net  revenue  of  individuals  and  social  classes,  and 
which  shall  take  into  account  the  variations  in  taxpaying  ability, 
has  thus  become  the  demand  of  modern  civilization." 

In  the  light  of  the  historical  development  of  taxation,  it  is 
argued  that  income  should  appear  to  the  lawmakers  of  progres- 
sive states  a  sound  basis  for  the  imposition  of  public  burdens. 
There  is  an  evident  equity  in  this  standard.  Clearly  it  is  the 
duty  of  the  citizen  to  support  the  government  in  proportion  to 
his  capacity  to  support  himself.  The  test  may  not  be  absolute ; 
but  in  what  truer  scales  can  be  measured  the  distribution  of 
these  burdens?  It  is  confidently  asked.  What  can  be  fairer  than 
that  each  citizen  should  annually  contribute  a  just  portion  of  his 
net  income  for  the  support  of  the  government  or  state  under 
which  he  has  elected  to  live,  and  in  default  of  which  he  would 
not  be  likely  to  have  either  gain,  income,  or  property?  Cumu- 
lative testimony  supports  the  allegation  that  the  income  tax  is  one 
of  the  most  equitable,  productive,  and  least  objectionable  forms 
of  taxation,  and  that  it  accords  in  the  highest  degree  with  those 
canons  or  maxims  which  are  regarded  by  nearly  all  economists 
and  jurists  as  the  highest  embodiment  of  human  wisdom  on  the 
subject. 


INCOME  TAX  loi 

Thus  the  broad  claim  is  made  that  the  income  tax  is  the  fair- 
est of  all  taxes;  that  it  tends  to  relieve  the  poorer  classes  and 
places  the  load  upon  the  shoulders  of  those  best  able  to  bear  it ; 
that  even  for  persons  of  large  means  it  is  advantageous ;  that 
the  private  revenue  of  an  individual,  by  reason  of  trade  con- 
ditions, varies  greatly— in  some  years  he  may  make  much,  in 
other  years,  without  any  appreciable  change  in  the  amount  of 
his  property,  his  income  may  be  trifling;  that  virhereas  the  gen- 
eral property  tax  mercilessly  demands  its  due  regardless  of 
the  year's  profits  or  losses,  the  income  tax  accommodates  itself 
to  the  varying  condition  of  the  taxpayer,  bears  lightly  upon  the 
business  man  who  is  struggling  to  keep  his  head  above  water, 
and  postpones  its  heaviest  call  until  the  year  of  plenty. 

The  tax  is  in  this  regard  the  protector  of  legitimate  business. 
The  prediction  has  been  ventured  that  its  substitution  for  the 
usual  property  taxes  would  save  many  a  man  from  bankruptcy. 
Unlike  license  taxes,  it  does  not  make  it  difficult  for  the  man 
of  small  capital  to  begin  business ;  unlike  the  personal  tax,  it 
does  not  levy  toll  upon  a  stock  of  merchandise  from  which,  be- 
cause of  financial  depression,  the  owner  is  perhaps  deriving  no 
profits ;  unlike  the  real  estate  tax,  it  does  not  increase  the  rent 
charge  of  every  store  and  factory,  whether  succeeding  or  fail- 
ing. The  tax  on  incomes  wisely  and  mercifully  regards  the 
present  ability  of  the  taxpayer,  relieving  him  in  adversity  and 
participating  in  his  prosperity. 

The  income  tax  has  the  further  claim  of  reaching  certain 
professional  classes  who  under  existing  laws  largely  escape  taxa- 
tion. Their  gains  are  great ;  they  live  comfortably  and  even  lux- 
uriously ;  they  provide  for  their  families  by  life  insurance  or 
other  untaxed  investments ;  yet  they  contribute  not  to  the  state 
under  whose  protection  they  thrive.  This,  it  is  said,  is  a  finan- 
cial injustice  to  the  other  classes  who  do  pay;  and,  more,  it  is 
harmful  to  the  commonwealth  itself.  It  creates  a  group  of  per- 
sons— often  well  educated,  with  opportunities  for  information 
and  leisure  for  public  service — who,  because  they  pay  nothing  to 
the  state,  become  indifferent  to  the  duties  of  citizenship.  They 
feel   no  direct   monetary  concern   in   the  business  of    the   state. 


10-'  SELECTED  ARTICLES 

They  disdainfully  disavow  any  interest  in  politics.  Whatever 
contribution  they  make  is  the  result  of  indirect  taxation,  and 
this  is  paid-  unconsciously.  The  exact  amount  contributed  by 
any  citizen  because  of  the  internal  revenue  and  customs  duties 
is  unknown  and  unascertainable.  There  would  be  a  social  and 
political  value  to  the  country  in  a  federal  tax  under  which  every 
citizen  would  consciously  pay  a  definite  sum.  Such  payment 
would  induce  a  more  careful  scrutiny  into  civic  affairs,  and 
would  tend  to  awaken  that  direct  and  universal  interest  in  pub- 
lic administration  which  is  the  safeguard  of  democratic  govern- 
ment. This  would  be  followed  by  more  orderly  methods  of 
business  on  the  part  of  individuals.  Men  would  keep  stricter 
accounts.  They  would  know  how  they  stand  themselves,  and 
financial  failures  due  to  ignorance  and  lack  of  method  would  be 
lessened. 

A  general  tax  levied  upon  the  net  income  of  individuals  has 
this  great  recommendation  :  it  has  no  tendency  to  disturb  prices. 
In  this  it  differs  from  certain  other  taxes,  which,  being  laid  on 
consumption,  influence  prices  and  affect  markets  and  values.  It 
is  contended  that  all  such  taxes  fall  most  heavily  upon  the  poor; 
that  whenever  the  levy  is  made,  not  on  the  basis  of  the  amount 
received,  but  on  the  basis  of  the  amount  consumed,  by  the  tax- 
payer and  his  family,  it  is  a  scheme  of  taxation  which,  of  neces- 
sity, rests  with  disproportionate  weight  upon  the  masses  of  the 
people;  and  that  "this  flagrant  injustice  to  the  poorer  class  of 
contributors"  can  be  compensated  for  only  by  an  income  tax  in 
which  small  incomes  shall  be  entirely  exempt. 

In  this  view  the  tax  ceases  to  be  merely  a  mode  of  raising 
revenue,  and  becomes  an  instrument  of  tremendous  social  and 
economic  importance.  Equality  of  taxation  should  be  the  first 
purpose  of  every  well-ordered  body  politic;  and  it  is  confidently 
claimed  that  equality  of  taxation  is  impossible  in  any  community 
without  the  income  tax ;  that  it  is  a  measure  by  which  to  pre- 
vent certain  kinds  of  property  from  obtaining  "a  position  of 
favoritism  and  advantage  inconsistent  with  the  fundamental 
principles  of  our  social  organization;"  that  it  is  the  only  pro- 
tection that  the  American  people  have  against  "the  dominion  of 


INCOME  TAX  103 

aggregated  wealth ;"  that  the  great  problem  before  the  states- 
man is  not  how  to  obtain  money  for  official  expenses,  but  how 
to  employ  the  taxing  power  so  as  to  curtail  riches  and  produce 
a  more  equal  level  of  private  possessions ;  that  conditions  in 
the  United  States  call  for  the  application  of  what  is  termed  the 
Jefifersonian  doctrine,  that  an  equality  of  wealth  must  be  pre- 
served among  the  people  "by  taxing  large  wealth  heavily,  smaller 
wealth  lightly,  and  least  wealth  not  at  all ;"  that  this  can  be 
accomplished  by  a  tax  on  gains  and  profits  so  framed  that  it 
will  not  touch  the  smaller  incomes,  but  w^ill  lay  a  vigorous  hand 
upon  the  annual  receipts  of  the  rich.  It  is  proclaimed  that  the 
income  tax  is  alone  capable  of  producing  these  equalizing  re- 
sults ;  that  justice  and  wisdom  demand  its  adoption  ;  and  that 
it  will  prove  not  a  burden  but  a  benefit  to  the  republic. 

Considerations  such  as  these  have  developed  a  strong  ten- 
dency all  over  the  world  to  employ  this  tax  as  a  means  of  raising 
a  portion  of  the  public  moneys.  Its  sponsors  point  with  assur- 
ance to  the  fact  that  it  has  proved  a  satisfactory  source  of  revenue 
in  the  countries  where  it  has  been  adopted ;  that  when  once 
placed  on  the  statute-books  it  has  generally  been  continued  and 
extended ;  that  the  difficulties  of  collection  have  been  found  to 
be  exaggerated:  and  they  contend  that  the  experience  of  nations 
like  England  and  Germany,  and  the  increasing  use  of  the  tax 
by  civilized  states,  form  the  best  and  most  conclusive  evidence 
in  favor  of  its  wisdom  and  efficiencj'. 

The  disadvantages.  The  critics  of  the  income  tax — with  a 
positiveness  equaling  that  of  their  opponents — hurl  back  the  as- 
sertion that  it  is  "tlie  most  odious  and  universally  condemned 
mode  of  taxation  resorted  to  by  any  nation ;"  that,  in  spite 
of  its  theoretical  justice,  it  has  generally  failed  in  its  actual 
operation  ;  that,  however  fair  and  alluring  its  principles,  in  prac- 
tice it  has  been  found  to  be  unequal  and  unjust,  undemocratic 
in  spirit,  inquisitorial  in  method,  debauching  to  the  public  morals, 
the  parent  of  perjury,  the  burden  on  the  back  of  industry,  an 
assault  upon  property,  and  a  step  toward  communism. 

There  can  be  no  denial  that  the  income  tax  is  unpopular. 
It    is    immediate,    undisguised,    personal    taxation ;    and    against 


104  SELECTED  ARTICLES 

this  human  nature  always  has,  and  probably  always  will,  rebel. 
It  meets  violent  opposition  where  indirect  taxes  are  cheerfully 
borne. 

A  salient  cause  for  this  repugnance  lies  in  the  fact  that  the 
tax  invades  the  right  of  privacy.  If  it  is  to  be  efficiently  en- 
forced, every  person  must  lay  bare  the  details  of  his  property  and 
business.  Every  item  of  his  private  transactions,  whether  entire- 
ly personal  or  in  connection  with  others  in  situations  of  the 
most  sacred  trust,  is  subject  to  exposure.  His  financial  strength 
becomes  the  object  of  envy ;  his  weakness  is  told  to  his  competi- 
tors, and  becomes  the  sweet  morsel  of  a  gossiping  public.  The 
tax  engrafts  the  spy  system  on  the  arm  of  the  government,  and 
in  its  train  comes  a  horde  of  impertinent  revenue  officers.  In 
its  administrative  features  it  answers  Samuel  Johnson's  chol- 
eric definition  of  the  word  excise  as  "a  hateful  tax." 

A  tax  which  is  ofifensive  to  the  citizen  and  which  he  regards 
as  unreasonably  oppressive  is  necessarily  difficult  of  collection. 
Evasion  is  its  legitimate  child,  and  evasion  must  be  followed 
with  methods  of  collection  constantly  increasing  in  harshness 
and  stringency.  As  the  Roman  tax-gatherer  found  in  torture 
a  frequent  aid  in  discovering  concealed  property,  so  agencies 
in  their  nature  arbitrary  and  inquisitorial  must  be  used  in  the 
collection  of  this  impost. 

These  methods  and  agencies  find  scant  welcome  in  democratic 
countries.  They  belong  essentially  to  despotic  governments, 
and  are  peculiarly  unsuited  to  republican  institutions.  This 
revenue  cannot  be  collected  unless  the  tax-gatherers  have  the 
power  to  compel  the  production  of  the  private  books  and  papers 
of  the  citizen  upon  which  to  base  the  assessment.  This  is  a 
power  which  the  legislature  will  hesitate  to  confer,  and  which, 
if  given,  will  prove  of  doubtful  efficiency.  "It  may  suit  the  pur- 
poses of  despotic  power,  but  it  cannot  abide  the  pure  atmosphere 
of  political  liberty  and  personal  freedom." 

The  taxation  of  incomes  invites  fraud,  deception,  and  dis- 
honesty. Mr.  Gladstone  said  that  an  income  tax  made  "a  nation 
of  liars,"  and  that  nothing  does  more  "to  demoralize  and  cor- 
rupt the  people."     Practically,  it  is  not  an  equitable  tax  on  in- 


I^'COME  TAX  105 

comes,  but  rather  a  tax  on  "ignorance  and  honesty;"  only  those 
pay  their  full  proportion  who  have  not  learned  the  methods 
of  evasion,  or,  knowing  the  means,  are  too  honorable  to  use 
them.  It  allows  a  man  in  failing  condition  to  report  a  fictitious 
income,  and  thereby  impose  upon  the  business  world ;  while  the 
actual  recipient  of  large  gains  conceals  them  to  avoid  the  tax. 

Before  adding  to  its  system  this  tax  which  demands  either 
universal  honesty  or  universal  espionage,  the  country  should 
listen  to  the  overwhelming  testimony  against  the  personal  prop- 
erty tax  as  now  attempted  to  be  enforced  by  the  various  states. 
Tax  commissions  have  declared  that  the  system  is  "debauching  to 
the  conscience  and  subversive  of  the  public  morals,"  that  "it 
puts  a  premium  on  perjury  and  a  penalty  on  integrity,"  and 
that  "the  attempt  to  enforce  these  laws  is  utterly  idle."  If  the 
assessment  of  personal  property  is  subject  to  such  difficulties 
and  evils,  what  will  be  the  extent  of  the  perjuries  and  public 
demoralization  under  an  attempt  to  enforce  an  income  tax? 
The  statistics  of  revenue  collected  during  the  Civil  War  tell 
a  graphic  story.  In  1869,  with  all  incomes  in  excess  of  $1,000 
subject  to  the  tax,  only  259,388  persons  out  of  37,000.000  ac- 
knowledged the  receipt  of  any  taxable  incomes.  It  has  been 
stated  that  only  officials  connected  with  the  treasury  depart- 
ment can  form  any  adequate  idea  of  the  amount  of  perjury  and 
fraud  which  pervaded  the  country  from  1867  to  1872,  and  that 
American  ingenuity  was  never  more  strikingly  illustrated  than 
in  devising  methods   for  evading  taxes. 

The  impositions  of  the  state  should  interfere  as  little  as 
possible  with  industrial  activity.  No  needless  check  should  be 
laid  upon  the  hands  engaged  in  the  beneficial  work  of  adding 
to  the  aggregate  of  the  national  wealth.  This  principle  the  in- 
come tax  ignores  and  violates.  It  is  a  tax  on  brains,  enter- 
prise, and  industry;  on  mind  and  energy.  It  is  an  encourage- 
ment to  shiftlessness  and  idleness  It  punishes  the  active  and 
frees  the  indolent.  It  exacts  a  contribution  from  the  worker 
at  the  time  when  every  dollar  of  capital  may  be  most  vitally 
needed  in  the  building  of  his  business. 

As    was    recently    said    by    Andrew    Carnegie;     "This    nation 


io6  SELECTED  ARTICLES 

will  never  regret  anything  so  much  as  attempting  to  collect  a 
tax  from  men  engaged  in  business — bees  making  honey  for  the 
national  hive." 

For  a  century  constructive  statesmen  have  sought  to  add  to 
the  nation's  progress  by  encouraging  manufactures  and  inviting 
the  investment  of  capital.  It  is  worth  while  to  consider  the  effect 
which  an  income  tax  would  have  in  nullifying  these  efforts.  The 
modern  movability  of  capital  must  be  taken  into  account.  As 
water  seeks  its  level,  so  capital  seeks  those  fields  where  it  is 
least  hampered  by  exactions.  Would  not  a  progressive  income 
tax — even  though  moderate  and  managed  with  the  utmost  cir- 
cumspection— lead  to  an  enormous  transfer  of  American  capital 
to  other  lands? 

The  tendency  of  income  tax  legislation  to  enlarge  the  class 
of  exempt  persons  is  noticeable.  The  law  of  1862  at  first  relieved 
incomes  under  $600,  then  under  $r,ooo,  and  later  under  $2,000, 
while  the  law  of  1894  freed  all  incomes  under  $4,000.  The 
exemption  of  all  save  the  larger  incomes  seems  now  to  be  an 
inherent  attribute  of  the  tax.  It  is  surely  its  most  popular  and 
attractive  feature.  This,  it  is  submitted,  is  essentially  class 
legislation.  It  differs  not  in  real  character  from  the  English 
statute  of  1691,  which  taxed  Protestants  at  a  certain  rate.  Cath- 
olics at  double  the  rate  of  Protestants,  and  Jews  at  another 
and  separate  rate.  All  such  discriminations,  as  a  logical  out- 
come, lead  to  oppression  and  abuses,  and  general  unrest  and  dis- 
turbance in  society.  The  plain  duty  is  before  every  citizen  to 
contribute  his  proportion,  however  small  the  sum,  to  the  sup- 
port of  the  government.  It  is  no  kindness  to  urge  him  to  escape 
from  this  obligation.  In  giving  his  mite  he  will  have  a  greater 
regard  for  the  government  and  greater  respect  for  himself. 
The  humblest  subject  should  not  be  put  in  the  conscious  position 
of  a  pauper  of  his  government. 

It  is  startling  to  consider  the  effect  which  an  exemption  of 
$4,000  has  in  transferring  the  burden  of  this  tax  upon  an  in- 
finitesimal portion  of  the  population.  In  democratic  countries, 
where  every  citizen  has  a  vote  regardless  of  property,  there  is 
naturally  a  strong  temptation  to  shift  the  load  of  governmental 


INCOME  TAX  107 

revenue  upon  the  shoulders  of  the  wealthy  few.  There  is  a  sin- 
ister significance  in  the  extent  to  which  Congress  yielded  to 
this  temptation  in  1894.  An  income  of  $4,000  at  five  per  cent, 
represents  a  fixed  capital  of  $80,000.  Thus  this  law  rejected 
as  objects  of  taxation  every  citizen  whose  taxpaying  ability 
represented  $80,000  or  less.  It  compelled  less  than  two  per  cent, 
of  the  taxable  inhabitants  to  contribute  ninety-five  per  cent,  of 
the  entire  tax.  Commenting  on  these  figures,  Senator  Edmunds, 
with  fine  scorn,  exclaimed:  "And  this  we  call  a  free  government 
— a  government  of  equal  protection  of  the  laws !" 

It  is  protested  that  the  philosophical  considerations  of  men 
who  love  liberty  and  wish  it  to  be  perpetuated  are  all  arrayed 
against  such  a  scheme  of  government.  It  is  so  evidently  unequal, 
discriminating,  and  partial  that  it  is  a  misnomer  to  call  it  taxa- 
tion. It  is  unmasked  confiscation.  Surely  such  legislation 
should  not  find  shelter  beneath  the  Constitution.  It  defies  not 
only  the  principles  of  that  great  document,  but  it  sweeps  away 
personal  and  property  rights  which  the  Supreme  Court  has  de- 
clared to  be  beyond  and  above  the  Constitution  : 

It  must  be  conceded  that  there  are  such  rights  in  every  free 
government  beyond  the  control  of  the  state.  A  government  which 
recognized  no  such  rights,  which  held  the  lives,  the  liberty,  and  the 
property  of  its  citizens  subject  at  all  times  to  the  absolute  dispo- 
sition and  unlimited  control  of  even  the  most  democratic  deposi- 
tory of  power,  is  after  all  but  a  despotism.  It  is  true  it  is  a  despo- 
tism of  the  many — of  the  majority,  if  you  choose  to  call  it  so — but 
it  is  none  the  less  a  despotism. 

With  solemn  earnestness  it  is  affirmed  that  the  violation  of 
this  doctrine  of  elemental  rights  will  be  followed  by  further  in- 
vasions, and  that,  as  one  vice  follows  another,  we  will  soon 
have  possibly  one  per  cent,  of  the  people  paying  the  taxes,  and 
finally  a  provision  that  only  the  twenty  persons  having  the 
greatest  estates  shall  bear  the  whole  taxation — "and  after  that 
communism,   anarchy,    and    then   the   ever   following   depotism." 

The  foregoing  statement  of  the  reasons  and  arguments 
which  have  been  presented  for  and  against  the  taxation  of  in- 
comes discloses  how  intense  and  fundamental  the  difference  of 
opinion  upon  this  question  is.  While  extreme  and  somewhat 
violent   utterances   are   not   unexpected   when   coming   from   the 


io8  SELECTED  ARTICLES 

stump  or  legislative  halls,  there  is  a  profound  significance  in 
some  of  the  statements  contained  in  the  divergent  opinions  filed 
by  the  Supreme  Bench  in  the  income  tax  cases,  where  one  learned 
justice  denounced  the  tax  then  proposed  not  only  as  unconstitu- 
tional, but  as  an  assault  on  wrealth  and  a  usurpation  of  power, 
while  another  expressed  his  deep  conviction  that  the  denial  of  the 
power  of  Congress  to  levy  the  tax  approached  the  proportion  of 
"a  national  calamity"  and  might  prove  "the  first  step  toward  the 
submergence  of  the  people  in  a  sordid  despotism  of  wealth." 

Amid  these  antagonistic  opinions,  what  is  the  true  course? 
A  trustworthy  chart  has  been  prepared  by  President  Roosevelt 
in  his  declaration  that  in  this  kind  of  taxation,  where  the  men 
who  vote  the  tax  pay  but  little  of  it,  there  should  be  a  clear 
recognition  of  the  danger  of  inaugurating  any  such  system  save 
in  the  spirit  of  entire  justice  and  moderation;  and  that  it  must 
be  made  clear  beyond  peradventure  that  the  aim  is  to  distribute 
burdens  equitably,  and  to  treat  rich  men  and  poor  men  on  a 
basis  of  absolute  equality.  But  will  the  country  steer  faithfully 
by  that  chart?  In  -1894  Congress  drifted  upon  the  dangerous 
reefs  of  discriminating  taxation.  If  the  mirage  of  its  impracti- 
cal fairness  shall  again  lure  Congress  to  enact  an  income  tax, 
it  should  at  least  be  so  framed  as  to  fall  upon  a  reasonable 
percentage  of  the  population.  It  should  not  by  its  narrow 
scope  nullify  the  uniformity  mandate  of  the  Constitution,  for, 
as  has  been  said,  when  that  occurs,  "it  will  mark  the  hour  when 
the  sure  decadence  of  our  present  government  will  commence." 
And  it  is  further  submitted  that,  before  any  income  tax  legisla- 
tion whatever  is  undertaken.  Congress  may  wisely  act  upon  the 
president's  recommendation  for  a  progressive  inheritance  tax. 
Such  a  measure  will  accomplish  many  of  the  good  results  and 
avoid  most  of  the  evils  attendant  upon  the  income  tax.  Let 
Congress,  therefore,  impose  a  reasonable  tax  on  inheritances, 
and  test  its  possibilities  of  revenue  and  its  equalizing  powers, 
before  resorting  to  a  tax  of  doubtful  constitutionality,  which 
in  practice  is  unequal,  discriminating,  obnoxious,  and  inefificient, 
the  foe  of  industry,  the  shroud  of  personal  honesty,  and  a 
stranger  to  the  true  spirit  of  our  laws  and  institutions. 


INCOME  TAX  109 

Outlook.  93:  328-9.  October  16,  1909. 

Income  Tax. 

The  Massachusetts  Republican  convention  declares  itself  in 
favor  of  an  income  tax,  but  raises  the  question  whether  such 
a  tax  should  be  levied  by  the  state  or  by  the  national  govern- 
ment, or  whether  there  should  be  two  taxes,  one  state,  the  other 
national.  It  bases  its  advocacy  of  an  income  tax  on  the  follow- 
ing principle : 

The  burden  of  taxation  should  be  distributed  so  as  to  bear 
most  heavily  upon  those  best  able  to  sustain  it. 

This  is  specious,  but  it  is  false.  Taxation  should  be  de- 
termined, not  by  the  ability  of  the  individual  to  pay  the  state, 
but  by  the  service  which  the  state  renders  to  the  individual.  The 
principle  laid  down  by  the  Massachusetts  Republican  state  con- 
vention is  an  application  of  the  socialistic  doctrine :  "From  every 
man  according  to  his  ability,  to  every  man  according  to  his  need." 
This  is  generosity,  not  justice.  Justice  requires  from  every  man 
a  fair  recompense  for  the  service  rendered  to  him.  A  fair 
equivalent  should  be  rendered  by  the  state  for  every  tax  col- 
lected; and  the  taxes  should  be  so  distributed  as  to  bear  most 
heavily  on  those  who  require  of  and  receive  from  the  state  the 
greatest  service.  The  principle  laid  down  by  the  Massachusetts 
convention  assumes  that  the  state  is  a  benevolent  corporation, 
and  that  every  man  should  contribute  to  its  treasury  on  the 
missionary  basis,  "as  the  Lord  hath  prospered  him."  .  But  the 
state  is  not  a  benevolent  corporation.  It  is  organized  primarily 
for  the  purpose  of  protecting  persons  and  property.  And  the 
amount  of  tax  to  be  paid  should  be  proportioned  to  the  amount 
and  cost  of  the  protection  furnished.  It  should  therefore  be 
proportioned  not  to  incomes  but  to  possessions. 

For  the  cost  of  protecting  persons  does  not  greatly  vary.  It 
costs  little  or  nothing  more  to  protect  a  banker  whose  salary 
is  twenty  thousand  dollars  a  year  than  to  protect  the  book- 
keeper whose  salary  is  one  thousand  dollars  a  year.  But  it 
costs  a  great  deal  more  to  protect  the  fifty-thousand-rloliar  house 
of  the  banker  and  the  various  corporations  in  which  the  banker 


110  SELECTED  ARTICLES 

has  invested  half  a  million  or  more  than  it  does  to  protect  the 
furniture  of  the  bookkeeper  in  his  rented  apartment.  A  tax 
levied  on  income  derived  from  investment  would  be  legitimate ; 
because  such  a  tax  would  be  levied  on  property,  and  so  would  be 
proportioned  to  the  service  rendered  by  the  community  to  the 
individual.  Taxes  levied  on  income  derived  from  industry 
are  not  legitimate ;  because  such  taxes  are  proportioned  to 
the  market  value  of  the  service  rendered  by  the  individual  to 
the  community. 


■/ 


Political  Science  Quarterly.  25:  193-219.  June,  1910. 
Income-Tax  Amendment.     Edwin  R.  A.  Seligman. 


J 

The  question  of  the  income-tax  amendment  of  the  federal 
Constitution  is  now  before  the  country.  The  general  move- 
ment in  favor  of  its  ratification  by  the  state  legislatures  has 
suffered  a  serious  set-back  through  the  opinion  expressed  by  the 
governor  of  the  state  of  New  York.  In  his  judgment,  the 
power  to  levy  an  income  tax  ought  assuredly  to  be  given  to  the 
national  government,  but  the  amendment  proposed  by  Congress 
labors  under  the  fatal  defect  that  it  would  empower  the  federal 
legislature,  by  taxing  state  and  municipal  bonds,  to  strike  at  the 
very  vitals  of  state  credit  and  state  independence. 

Governor  Hughes  is  so  excellent  a  lawyer  and  so  great  a 
statesman  that  his  opinion  is  not  lightly  to  be  controverted. 
But  in  my  judgment  it  is  erroneous  in  three  respects: 

(i)  His  interpretation  of  the  legal  force  of  the  amendment 
is  incorrect. 

(2)  Even  were  his  legal  interpretation  correct,  he  fails  to 
take  account  of  economic  facts  which  would  prevent  the  con- 
sequences  which   he    fears. 

(3)  Even  were  his  view  correct,  that  the  constitutional 
amendment  would  operate  to  change  the  law  in  the  direction 
indicated,  there  are  valid  reasons  why  the  law  should  be  so 
changed  and  the  amendment  prevail. 

Let  us  take  up  each  of  these  points  in  order. 


INCOME  TAX  III 


A  long  series  of  decisions  has  established  the  doctrine  that 
there  are  limitations  implied  as  well  as  express  upon  the  power 
of  taxation,  both  of  the  federal  and  of  the  state  governments. 
In  the  case  of  McCulloch  v.  Maryland,  decided  in  1819,  it  was 
held  that  a  state  tax  on  the  Bank  of  the  United  States  was  un- 
constitutional.    Chief  Justice  Marshall,  in  this  case,  stated : 

That  the  power  t6  tax  involves  the  power  to  destroy;  that  the 
power  to  destroy  may  defeat  and  render  useless  the  power  to  cre- 
ate; that  there  is  a  plain  repugnance  in  conferring  on  one  govern- 
ment a  power  to  control  the  constitutional  measures  of  another, 
which  other,  with  respect  to  those  very  measures,  is  declared  to  be 
supreme  over  that  which  exerts  the  control,  are  propositions  not 
to  be  denied.  .  .  .  The  states  have  no  power,  by  taxation  or 
otherwise,  to  retard,  impede,  burthen,  or  in  any  manner  control, 
the  operations  of  the  constitutional  laws  enacted  by  Congress  to 
carry  into  execution  the  powers  vested  in  the  general  government. 

A    few    years    later,    1824,   the    same   proposition    was    advanced 

in  the  case  of  Osborn  v.  United  States  Bank.     The  next  step 

was  taken  in  1829,  when,  in  the  case  of  Weston  v.  Charleston, 

a    local    tax    on    federal    bonds    was    declared    unconstitutional. 

The  court  said : 

The  tax  on  government  stock  is  a  tax  on  the  contract,  a  tax  on 
the  power  to  borrow  money,  on  the  credit  of  the  United  States, 
and  consequently  repugnant  to  the  Constitution.  .  .  .  The  right 
to  tax  the  contract  to  any  extent,  when  made,  must  operate  upon 
the  power  to  borrow  before  it  is  exercised  and  have  a  sensible 
influence  on  the  contract.  The  extent  of  this  influence  depends 
upon  the  will  of  a  distinct  government.  To  any  extent,  however 
inconsiderablf,    it    is   a   burthen    on    the   operations   of   government. 

Agai/i,   in    1842,    in   the    case   of    Dobbins   v.    Commissioners   of 

Erie  County,  it  was  held  that  a  local  tax  was  invalid  so  far  as 

the  salaries  of  federal  officers  were  concerned.     And  finally,  in 

1862,  in  the  case  of  Bank  of  Commerce  v.  City  of  New  York, 

it  was  decided  that  a  state  tax  on  the  capital  stock  of  a  bank, 

when  such  capital  stock  consisted,  in  whole  or  in  part,  of  United 

States  bonds,  was  unconstitutional. 

Beginning  at  a  later  period,  another  series  of  decisions  de- 
clared that  the  federal  government  was  likewise  restrained  from 
taxing  state  operations  and  agencies.  In  the  case  of  Collector 
V.  Day,  decided  in  1870,  the  federal  civil-war  income  tax  was 
held  to  be  unconstitutional  so  far  as  it  applied  to  the  salaries  of 
state  judicial  officers.     The  court  said: 


112  SELECTED   ARTICLES 

It  is  admitted  that  there  is  no  express  provision  in  the  Consti- 
tution that  prohibits  the  general  government  from  taxing  the 
means  and  instrumentalities  of  the  states,  nor  is  there  any  prohibit- 
ing the  states  from  taxing  the  means  and  instrumentalities  of 
that  government.  In  both  cases  the  exemption  rests  upon  neces- 
sary implication,  and  is  upheld  by  the  great  law  of  self-preserva- 
tion; as  any  government,  whose  means  employed  in  conducting  its 
operations,  if  subject  to  the  control  of  another  and  distinct  govern- 
ment, can  only  exist  at  the  mercy  of  that  government.  Of  what 
avail  are  these  means  if  another  power  may  tax  them  at  discre- 
tion? 

In  United  States  v.  Baltimore  and  Ohio  Railroad  Company, 
decided  in  1872,  it  wras  held  that  the  United  States  government 
cannot  tax  "the  agencies  and  instruments"  of  the  states.  In 
Mercantile  Bank  v.  New  York,  decided  in  1886,  which  held  that 
a  state  tax  on  the  shareholders  of  national  banks  was  valid 
for  special  reasons,  not  necessary  here  to  discuss,  it  was  stated, 
although  indeed  obiter,  that  bonds  issued  by  a  state,  "or  under 
its  authority  by  its  public  municipal  bodies,  are  means  for  carry- 
ing on  the  work  of  government,  and  are  not  taxable  even 
by  the  United  States."  And  finally,  in  Pollock  v.  Farmers' 
Loan  and  Trust  Company,  decided  in  1894,  the  foregoing  dic- 
tum was  cited  with  approval,  and  it  was  distinctly  held  that  a 
tax  upon  incomes  from  municipal  bonds  was  unconstitutional. 
The   court    said : 

It  was  long  ago  determined  that  the  property  and  revenues  of 
municipal  corporations  are  not  subjects  of  federal  taxation.  The 
same  want  of  power  to  tax  the  property  or  revenue  of  the  states 
or  their  Instrumentalities  exists  in  relation  to  a  tax  on  the  income 
from    their    securities. 

It  is  accordingly  an  established  rule  of  constitutional  inter- 
pretation that  state  and  municipal  bonds  are  not  subject  to  fed- 
eral taxation. 

The  question  which  now  confronts  us  is :  Will  the  adoption 
of  the  proposed  amendment  change  this  situation?  The  amend- 
ment states  that  Congress  "shall  have  power  to  lay  and  collect 
taxes  on  income,  from  whatever  source  derived,  without  appor- 
tionment among  the  several  states,  and  without  regard  to  any 
census  or  enumeration."  What  does  this  mean?  It  is  obvious 
that  the  government  now  has  power  to  levy  an  income  tax ;  but 
in  attempting  to  levy  such  a  tax  it  is  met  by  those  provisions 
of  the  Constitution  which  declare,  first,  "that  no  capitation  or 
other  direct  tax  shall  be  laid  unless  in  proportion  to  the  census 


INCOME  TAX  113 

or  enumeration  hereinbefore  directed  to  be  taken,"  and  secondly, 
that  "representatives'  and  direct  taxes  shall  be  apportioned 
among  the  several  states  according  to  their  respective  num- 
bers." If  these  provisions  apply  to  the  taxation  of  income,  they 
mean  that  if  state  A,  with  the  same  population  as  state  B, 
has  five  times  the  wealth,  the  income  tax  payable  by  a  citizen 
of  state  B  will  be  five  times  as  large  as  that  payable  by  an 
equally  wealthy  citizen  of  state  A.  So  monstrous  an  inequality 
would  of  course  prevent  Congress  from  imposing  an  income 
tax  as  a  direct  tax.  To  make  a  federal  income  tax  practicable, 
it  is  necessary  either  to  declare  it  to  be  an  indirect  tax— the 
sole  restriction  as  to  which  is  that  it  shall  be  uniform— or  ex- 
pressly to  permit  the  levying  of  an  income  tax  without  appor- 
tionment. 

For  many  years  the  income  tax  was  supposed  to  be  an  indirect 
tax  in  the  sense  in  which  the  term  is  used  in  the  Constitution. 
Toward  the  close  of  the  War  of  1812  the  Committee  of  Ways 
and  Means  brought  in  a  scheme  for  an  income  tax,  and,  had 
peace  not  been  suddenly  declared,  the  scheme  would  have  been 
adopted.  Many  signers  of  the  Constitution  were  still  living, 
and  no  one  raised  the  objection  that  the  income  tax  was  di- 
rect in  the  constitutional  sense.  During  the  Civil  War  an 
income  tax  was  levied,  and  in  the  first  cases  adjudicated  it 
was  upheld.  Taking  each  of  these  cases  as  decisive  only  of  the 
precise  question  before  the  court,  it  was  settled  in  Pacific  In- 
surance Company  v.  Soule  that  a  tax  on  the  premiums  received 
by  an  insurance  company  is  not  a  direct  tax,  and  in  Springer  v. 
United  States  that  a  tax  on  the  income  which  an  individual 
derives  in  part  from  professional  earnings  and  in  part  from  the 
interest  on  bonds  is  not  a  direct  tax.  In  the  Pollock  case,  on 
the  other  hand,  it  was  decided  that  a  tax  on  the  income  from 
real  estate  is  a  direct  tax,  valid  only  when  apportioned,  while  a 
tax  on  municipal  bonds  was  declared  to  be,  like  a  tax  on  the 
salaries  of  state  officers,  entirely  invalid  for  lack  of  power  to  im- 
pose it. 

The  Supreme  Court  of  the  United  States  has  thus  held  that 
certain   kinds   of   income   taxes   are   indirect,   that   certain   other  ^ 


114  SELECTED  ARTICLES 

kinds  of  income  taxes  are  direct,  and  that  still  other  kinds  of 
income  taxes  are  invalid,  irrespective  of  whether  they  are  direct 
or  indirect.  rSo  far  as  the  first  two  classes  are  concerned,  there- 
fore, the  court  has  stated  the  law  to  be  that  a  tax  on  incomes 
from  certain  sources,  being  direct,  can  be  levied  only  through  ap- 
portionment, and  that  a  tax  on  incomes  from  other  sources, 
being  indirect,  can  be  levied  without  apportionment.  '  The  ob- 
ject of  the  pending  constitutional  amendment  is  simply  to  re- 
move this  discrimination  and  to  make  it  possible  to  tax  incomes 
without  apportionment,  whether  the  sources  of  the  incomes  are 
regarded  as  falling  within  the  one  category  or  the  other.  That 
is,  the  amendment  declares  that  an  income  tax  can  henceforth 
be  levied  without  apportionment,  no  matter  what  the  source 
may  be,  i.  e.,  no  matter  whether  the  source  is  one  that  at  pres- 
ent necessitates  apportionment  or  one  that  at  present  does  not 
necessitate  apportionment.  /  When  the  amendment  states  that 
the  government  shall  have^power  to  levy  a  tax  "on  incomes, 
from  whatever  source  derived,  without  apportionment,"  chief 
emphasis  is  to  be  put  upon  the  words  "without  apportionment." 

/'"The  words  "from  whatever  source  derived"  are  indeed  no  mere 
surplusage.  On  the  contrary,  their  real  import  is  to  remove 
the  existing  discrimination  between  the  various  sources  of  in- 
come, so  far  as  apportionment  is  concerned,  and  to  put  those 
sources  which,  under  the  existing  interpretation,  can  be  taxed 
only  through  apportionment  in  the  same  category  as  those 
sources  which  can  now  be  taxed  without  apportionment.  To 
say  "from  whatever  source  derived"  is  simply  another  way  of 
saying  "irrespective  of  the  source,"  or  a  shorter  way  of  saying 
"from  all  sources  alike,  whether  the  source  be  one  that  pre- 
viously made  apportionment  necessary  or  not."  So  that  the 
amendment  is  equivalent  to  the  statement  that  "Congress  shall 

\have  power  to  lay  and  collect  a  tax  on  incomes,  whether  pre- 
viously laid  by  apportionment  or  not,  without  apportionment." 
It  is  accordingly  a  mistake  to  assume  that  the  words  "from 
whatever  source  derived"  give  the  government  the  power  to  tax 
the  income  from  state  or  municipal  bonds,  for  such  a  tax  falls 
within  the  third  category  of  income  taxes  mentioned  above  as 


INCOME  TAX  115 

being  entirely  beyond  the  taxing  power  of  the  federal  govern- 
ment. I 
This  has  been  clearly  recognized  by  the  Supreme  Court.  / 
In  the  Pollock  case  it  was  expressly  held  that  the  objection 
to  the  taxation  of  municipal  bonds  was  lack  of  power  on  the 
part  of  the  general  government  to  interfere  with  the  operations 
of  state  government.'  When  the  Pollock  case  was  reheard,  the 
court  said,  in  reference  to  the  grounds  of  the  decision  in  the 
original  hearing:  "As  to  the  income  from  municipal  bonds, 
that  could  not  be  taxed  because  of  want  of  power  to  tax  the 
source,  and  no  reference  was  made  to  the  nature  of  the  tax  as 
being  direct  or  indirect."  Both  on  the  original  hearing  and  on 
the  rehearing,  dissenting  opinions  were  read,  but  on  the  point 
which  we  are  now  considering  there  was  no  dissent.  Justice 
White  said : 

The  decisions  of  this  court,  holding  that  the  federal  government 
is  without  power  to  tax  the  agencies  of  the  state  government, 
embrace  sucli  bonds  [j.  e.,  those  of  municipal  corporations]  .... 
Where  there  is  no  power  to  tax  for  any  purpose  whatever,  no  di- 
rect or -indirect  tax  can  be  imposed  ....  The  levy,  whether  direct 
or  indirect,  is  beyond  the  taxing  power. 

Justice  Harlan,  who  concurred  with  the  views  expressed  by 
Justice  White,  added  :  "It  is  immaterial  to  inquire  whether  the 
tax  [on  the  income  of  municipal  bonds]  is,  in  its  nature  or  by 
its  operation,  a  direct  or  an  indirect  tax  ;  for  the  instrumentali- 
ties of  the  states  .  .  .  are  not  subjects  of  national  taxation  in 
any  form  or  for  any  purpose."  And  Justice  Brown  stated  that  a 
tax  upon  the  income  of  municipal  bonds  was,  in  his  opinion,  a 
"tax  upon  something  which  Congress  has  no  right  to  tax  at  all, 
and  hence  is  invalid.  Here  is  a  question,  not  of  the  method  of 
taxation,  but  of  the  power  to  subject  the  property  to  taxation 
in  any  form." 

It  is  clear,  therefore,  that  a  change  in  the  method  of  assess- 
ing an  income  tax,  from  that  of  apportionment  to  that  of  direct 
levy,  cannot  make  any  difiference  as  to  the  power  of  the  gov- 
ernment to  tax  the  income  of  state  or  municipal  bonds.  If  the 
federal  government  is  precluded  by  the  very  nature  of  the  con- 
stitutional pact,  as  we  are  told  in  Collector  v.  Day,  from  impos- 
ing  any   tax    on    state   agencies,   power   to   do   this   will    not   be 


ii6  SELECTED  ARTICLES 

conferred  upon  it  by  an  amendment  which  simply  changes  the 
method  of  levying  a  particular  kind  of  tax.  What  is  now  non- 
taxable will  remain  non-taxable.  A  change  in  the  method  of 
taxation  does  not  constitute  a  change  in  the  subject  of  taxation. 
Any  other  interpretation  of  the  amendment,  moreover,  would 
result,  in  the  event  of  its  adoption,  in  a  situation  which  may 
well  be  characterized  as  absurd.  (The  existing  inability  of  the 
federal  government  to  tax  the  property  of  a  state  or  the  instru- 
mentalities of  its  government  will  of  course  continue,  for  the 
amendment  clearly  does  not  empower  Congress  to  tax  property 
(?as  such^  If  it  were  to  be  held  that  the  amendment  gave  the  fed- 
eral government  power  to  tax  the  incpme  of  state  bonds,  we 
should  then  have  the  awkward  result  that  the  federal  government 
could  not  tax  the  bonds  themselves  but  could  tax  the  income  from 
the  bonds.  Or,  to  take  a  still  more  absurd  case,  if  a  state  or  mu- 
nicipality possessed  some  revenue-yielding  property,  like  a  piece 
of  real  estate,  it  would  be  competent  for  the  federal  goverment 
to  tax  that  real  estate  if  it  assessed  the  tax  eo  nomine  on  the 
income,  while  it  would  be  incompetent  for  the  federal  govern- 
ment to  tax  the  real  estate  if  the  tax  were  levied  on  the  property 
as  such.  In  view  of  the  fact  that  the  market  value  of  any  piece 
of  property  is  due  only  to  its  present  and  prospective  income, 
it  will  readily  be  perceived  in  what  a  maze  of  contradictions  we 
should  be  involved  by  the  acceptance  of  so  strained  an  interpre- 
tation of  the  amendment.  When  two  interpretations  of  a  clause 
are  possible,  of  which  the  one  is  not  only,  as  the  Supreme  Court 
has  asserted,  in  direct  opposition  to  the  spirit  of  the  Constitu- 
tion but  is  also  calculated  to  bring  about  the  most  awkward 
practical  situation,  while  the  other  is  in  complete  harmony  with 
the  trend  of  judicial  decisions  and  at  the  same  time  is  likely  to 
obviate  all  fear  of  fiscal  contradictions  or  complications,  is  it  not 
reasonable  to  assume  that  the  court  will  prefer  the  second  and 
more  natural  interpretation?  Such  an  interpretation  is  the  one 
which  puts  the  emphasis  on  the  words  "without  apportion- 
ment" and  regards  the  amendment  as  legalizing  a  change  simply 
in  the  method  of  levying  the  tax — a  change  from  apportionment 
to  direct  assessment. 


INCOME  TAX  117 

We  are  therefore  justified  in  concluding  that  the  essential 
character  of  the  implied  restrictions  in  the  Constitution  will  not 
be  altered  one  whit  by  the  amendment.  State  and  municipal 
bonds  will  henceforth,  as  before,  be  exempt  from  federal  taxa- 
tion, whether  the  tax  be  imposed  on  the  property,  or  whether 
it  be  imposed  on  the  income  from  the  property. 


II. 

If  now  for  the  sake  of  argument,  it  be  assumed  that  the 
contrary  view  is  legally  correct,  and  that  the  effect  of  the  pro- 
posed constitutional  amendment  would  be  to  legalize  the  taxa- 
tion of  state  and  municipal  bonds,  it  may  still  be  shown  that 
the  consequences  mentioned  in  the  message  of  Governor  Hughes 
would  not  follow.  We  are  told  that  the  amendment  might 
"place  the  borrowing  capacity  of  the  state  and  of  its  govern- 
mental agencies  at  the  mercy  of  the  federal  taxing  power," 
and  that  it  might  "place  such  limitations  upon  the  borrowing 
power  of  the  state  as  to  make  the  performance  of  the  functions 
of  local  government  a  matter  of  federal  grace." 

This  opinion,  as  I  hope  to  show,  is  erroneous,  and  the  error 
is  traceable  to  the  lack  of  an  adequate  economic  analysis  on 
the  part  of  the  governor — an  analysis  indeed,  which  is  equally 
absent  from  the  legal  decisions  which  have  misled  him.  In 
other  words  even  if  the  governor's  law  be  sound,  his  economic 
reasoning  is  unsound,  and  his  final  position  is  still  untenable. 
Let  us  leave  for  a  time,  the  whole  domain  of  legal  contention 
and  discuss  the  question  of  the  economic  effect  of  the  amend- 
ment. 

The  objection  to  a  tax  on  governmental  securities  rests  on  the 
presumption  that  their  market  value  will  be  affected  by  the  tax. 
As  the  Supreme  Court  said  in  1829,  in  Weston  v.  Charleston: 
The  tax  on  governmr-nt  stock  i.s  a  tax  on  Die  contract,  a  tax  on 
the  power  to  borrow  money,  on  the  credit  of  the  government.  .  .  . 
The  right  to  tax  the  contract  to  any  extent,  when  made,  must 
operatf  upon  the  power  to  borrow  before  it  is  exercised,  and  have 
a  sensible  influence  f)n   the  contract. 

Of   course   this    sensible   influence   on    the   contract   can    register 
itself  only  in  the  lower  market  price  of  the  securities.     This  is 


y 


ii8  SELECTED   ARTICLES 

the  result  of  the  familiar  economic  principle  known  as  the  capi- 
talization   or   amortization   of   taxation. 

The  theory  of  the  capitalization  of  taxation  is,  in  effect, 
that  when  a  recurring  tax  of  virtually  the  same  amount  is  im- 
posed upon  the  capital  or  selling  value  of  some  durable  or  per- 
manent property,  the  selling  value  of  that  property  will  be 
reduced  by  a  sum  equal  to  the  capitalization  of  the  tax.  If, 
for  instance,  the  normal  rate  of  interest  on  securities  is  five  per 
cent,  and  a  five-percent  bond  has  been  selling  at  par,  and  if  a 
new  tax  of  one  per  cent  per  annum  be  imposed  upon  that  par- 
ticular class  of  securities,  the  price  of  the  bond  will  fall  from 
100  to  about  80^.  The  new  purchaser  of  the  bond  will  net  only 
four  dollars  on  the  hundred,  since  he  has  to  pay  one  dollar  in 
taxes.  If,  however,  he.can  look  forward  to  a  net  return  of  only 
four  dollars,  and  if  the  general  rate  of  interest  still  remains  at 
five  per  cent,  he  will  naturally  pay  only  eighty  dollars  for  that 
bond.  There  is  no  reason  why  he  should  pay  more,  since  he 
can  continue  to  invest  his  money  in  enterprises  which  are  not 
taxed  and  which  will  still  net  him  five  per  cent.  In  other 
words,  the  annually  recurring  tax  of  one  per  cent  will  be  capi- 
talized into  a  sum  which  is  automatically  deducted  from  the 
market  value  of  the  securities,  thus  bringing  about  an  amortiza- 
tion of  these  securities.     At  any  given  time  the  discrepancy  be- 

lAs  a  matter  of  fact,  whether  the  price  of  the  security  upon 
which  the  new  tax  is  imposed  will  fall  exactly  to  80  depends  very 
largely  upon  the  amount  of  these  securities,  compared  with  the 
total  amount  of  capital  in  the  country.  If  the  amount  of  these 
newly  taxable  securities  is  comparatively  large,  the  price  will  not 
fall  quite  to  80,  but  perhaps  only  to  81;  for  the  imposition  of  a  tax 
on  so  large  a  part  of  the  outstanding  capital  of  the  country  will 
probably  have  an  influence,  even  though  slight,  on  the  general 
rate  of  interest  and  may  reduce  that  general  rate  from  five  per  cent 
to  perhaps  four  and  seven-eighths  or  four  and  fifteen-sixteenths. 
If  a  large  amount  of  capital  is  transferred  from  these  newly  taxed 
bonds  to  other  securities,  the  increasing  demand  for  these  other 
securities,  previously  selling  at  par,  will  enhance  their  price  to  a 
little  above  par.  As.  however,  the  net  return  on  these  other  se- 
curities remains  at  five  dollars,  this  is  enuivalent  to  saying  that 
the  rate  of  interest  on  the  investment  will  now  be  a  little  below 
five  per  cent.  If  the  general  rate  of  interest  falls  to  a  little  below 
five  per  cent,  the  market  value  of  the  taxed  securities  will  now  be 
a  little  over  80.  If,  as  is  usually  the  case,  the  taxed  security  forms 
only  an  insignificant  part  of  the  whole  amount  of  capital,  the  in- 
fluence on  the  general  rate  of  interest  will  be  inappreciable,  and 
the  price  of  the  security  will  fall  to  80. 


INCOME  TAX  119 

tween  the  taxed  and  the  untaxed  securities  will  be  precisely 
such  as  to  make  the  net  income  from  each  equal  the  normal 
rate  of  interest,  and  the  difference  in  the  market  value  of  the 
two  classes  of  securities  will  always  be  exactly  equal  to  the  cap- 
italization  of   the   tax. 

The  influence  of  tax  exemption  is  the  very  reverse  of  that  ex- 
ercised by  taxation.  If  all  securities  have  hitherto  been  subject 
to  taxation,  and  if  one  particular  class  of  securities  be  suddenly 
exempted,  the  value  of  these  tax-exempt  securities  will  rise  by 
an  amount  equivalent  to  the  capitalization  of  tax.  If  five-per- 
cent bonds  which,  like  all  other  forms  of  capital  that  are  subject 
to  a  tax  of  one  per  cent,  sell  at  par,  it  means  that  the  normal 
rate  of  interest  is  four  per  cent,  since  investors  net  four  dollars 
on  every  hundred  dollars.  If  this  particular  class  of  bonds  be 
now  exempted  from  taxation,  the  price  of  the  bonds  will  appre- 
ciate to  125,  since  five  dollars  bear  the  same  relation  to  $125  as 
four  dollars  do  to  $100.  Thus,  whatever  way  we  look  at  it, 
taxation  will  diminish  the  market  value  of  bonds  just  as  exemp- 
tion will  increase  their  market  value. 

Where  an  annual  tax  is  actually  enforced,  and  where  other 
conditions  remain  the  same,  the  difference  between  taxable  and 
non-taxable  securities  is  indeed  precisely  in  accord  with  the 
capitalization  theory.  In  the  United  States,  however,  the  in- 
fluence of  taxation  is  sensibly  modified  by  prevailing  conditions, 
and  the  discrepancy  between  taxable  and  non-taxable  bonds  is 
far  less  than  might  be  expected.  The  rate  of  the  local  property 
tax  varies  in  the  United  States  from  one  and  one  half  per  cent 
to  over  two  per  cent.  Let  us  take  two  per  cent  as  the  normal 
figure.  Let  us  also  assume  that  the  current  rate  of  interest  is 
four  per  cent,  so  that  four-percent  bonds  will  sell  at  about  par. 
If  there  were  no  property  tax,  and  if  these  bonds  were  now 
sul>jcctod  to  the  two-i)crccnt  tax,  they  wcnild  manifestly  fall  to 
50,  since  one-half  of  their  yield  would  l)e  eaten  up  by  the  tax. 
If,  on  the  other  hand,  we  take  the  actual  law  under  which  all 
property  is  taxaiilc  at  the  rate  of  two  per  cent,  tlu-ii  if  the  four- 
percent  bonds  were  exempted  from  taxation  their  price  on  the 
market  ought  to  rise  from  par  to  200;  for  instead  of  the  holder 


120  SELECTED  ARTICLES 

netting  two  dollars  on  each  one  hundred  dollars  (four  dollars 
interest  minus  two  dollars  tax),  he  would  now  net  four  dollars, 
or  double  the  amount.  A  doubling  of  the  income,  however, 
would  involve  a  doubling  of  the  market  value. 

As  a  matter  of  fact,  the  disparity  between  taxable  and  tax- 
exempt  securities  in  our  American  states  falls  far  short  of  reach- 
ing this  point.  This  is  true  not  only  of  exemption  from  a 
special  tax  but,  and  in  still  larger  measure,  of  exemption  from 
a  general  tax.  A  good  example  of  the  influence  of  a  special 
exemption  is  afforded  by  the  New  York  state  canal  bonds. 
When  these  bonds  were  authorized,  to  provide  for  the  enlarge- 
ment of  the  Erie  canal,  the  constitutional  amendment  limited 
the  rate  of  interest  to  three  per  cent.  By  the  time  that  it  had 
become  necessary  to  issue  the  bonds,  the  market  had  fallen  to 
such  a  point  that  they  were  not  salable,  and  in  order  to  change 
the  rate  another  constitutional  amendment  became  necessary. 
To  arrange  for  the  state  finances  in  the  interval,  a  law  was 
passed  granting  to  the  three-percent  bonds  a  special  exemp- 
tion of  one  per  cent,  to  be  applied  against  the  franchise  tax 
of  similar  amount,  payable  by  savings  banks,  trust  companies 
and  insurance  companies.  The  three-percents,  as  a  result,  sold 
around  a  2.90-per  cent  basis,  and  the  four-percents  around  a 
3.^5-per  cent  basis.  Even  here,  therefore,  the  difference  in  the 
price  of  the  bonds  was  only  about  one-half  of  the  capitalization 
of  the  tax. 

The  case  of  general  exemption  is  illustrated  in  Massachusetts. 
In  that  state  all  municipal  bonds  issued  after  May  i,  1908,  are 
exempt  from  taxation.  The  old  taxable  three-and-one-half- 
percent  Boston  bonds  sold  in  1910  in  Massachusetts  on  about  a 
3.80-percent  basis,  the  new  tax-exempt  bonds  sold  on  about  a 
3.40-percent  basis,  i.  c.  at  101.83  as  compared  with  94.76.  The 
tax  rate  was  about  1.65,  almost  one-half  of  the  income  of  the 
bonds.  In  other  words,  a  tax  exemption  of  almost  fifty  per  cent 
of  income  made  a  difference  of  only  seven  per  cent  in  selling 
value.  Even  this  difference,  moreover,  is  largely  due  to  the  fact 
that  the  chief  purchasers  of  Boston  bonds  are  the  Massachu- 
setts savings  banks,  which   are   subject  to  a  fixed   tax   of  one- 


INCOME  TAX  121 

half  of  one' per  cent— a  tax  that,  is  collected  with  comparative 
efficiency. 

Where  the  bonds  command  a  wider  market,  the  influence  of 
tax  exemption  is  naturally  far  less  marked,  because  the  ex- 
emption applies  only  within  the  state.  In  Pennsylvania,  for 
instance,  bonds  are  subject  to  a  tax  of  four  mills  on  the  dollar, 
and  some  corporations  and  municipalities  pay  the  tax  without 
deducting  it  from  the  interest.  In  the  case  of  the  smaller 
municipalities,  whose  bonds  are  sold  only  locally  or  within  the 
state,  this  tax  produces  a  difference  in  price  between  taxable 
and  tax-exempt  bonds,  but  a  difference  that  is  far  less  than  a 
capitalization  of  the  tax.  In  the  larger  cities,  however,  like 
Philadelphia,  Pittsburg  and  Scranton,  where  the  bonds  are  a 
legal  investment  for  New  York  savings  banks  and  thus  reach  a 
wider  market,  the  difference  in  value  is  exceedingly  slight.  A 
bond  which  sells  on  a  3.90-percent  basis,  tax-exempt,  would  in 
such  cases,  if  taxable,  sell  only  on  about  a  four-percent  basis. 
In  the  case  of  general  corporate  securities  which  have  a  still 
wider  market,  the  difference  due  to  tax  exemption  is  almost 
inappreciable.  A  taxable  security  selling  at  100  will  frequently 
compare  with  a  tax-exempt  security  at  102  or  103 — a  difference 
which,  when  spread  over  the  years  prior  to  the  maturity  of  the 
bond,  represents  only  the  merest  fraction  of  the   four-mills  tax. 

In  most  of  the  states,  however,  the  tax  rate  is  not  four  mills, 
as  in  Pennsylvania,  but,  as  stated  above,  from  one  and  one-half 
to  two  per  cent.  Even  where  a  serious  attempt  is  made  to  en- 
force the  personal  property  tax,  as  in  Ohio,  with  its  tax-inquisi- 
tor law,  the  only  result  is  that  tax-exempt  bonds — Cincinnati 
bonds,  for  instance — sell  on  a  3.80-percent  basis  in  the  local 
market,  while  in  the  general  outside  market  they  would  sell  at 
a  lower  price — namely  on  a  3.Q0  or  3.95-percent  basis.  The 
actual  tax,  or  the  risk  of  taxation  of  two  per  cent,  hence  means  a 
difference  of  only  a  few  points  in  the  value  of  the  securities. 

Even  within  the  area  of  tax  exemption,  the  larger  the  amount 
of  the  tax-exempt  securities,  the  smaller  will  be  the  difference 
in  value  between  them  and  the  taxable  securities.  In  New  York, 
for  instance,  so  long  as  tax-exempt  bonds  were  rare,  they  com- 


\J 


122  SELECTED   ARTICLES 

manded  somewhat  of  a  premium :  the  New  York  City  two-and- 
one-half-percent  bonds  at  one  time  sold  above  par,  because 
they  were  much  sought  after  by  trustees  of  trust  estates  who 
were  desirous  of  escaping  the  burdensome  local  tax.  Since 
1908,  however,  all  municipal  bonds  are  exempt  from  general 
taxation  throughout  the  state ;  and  the  result  has  been  a  pro- 
gressive disappearance  of  the  difference  in  price  between  taxable 
and  tax-exempt  bonds.  Of  course  two  other  factors  have  been 
cooperating ;  the  one,  that  the  market  in  New  York  city  bonds 
now  transcends  the  capacity  of  New  York  city  investors ;  the 
other,  that  the  assessment  of  taxable  securities  in  the  hands  of 
individuals,  under  the  local  general  property  tax,  is  becoming 
even  more  infrequent  than  it  was  formerly.  Undoubtedly,  how- 
ever, the  chief  factor  in  the  progressive  elimination  of  the 
premium  on  tax-exempt  bonds  is  the  increase  in  their  quantity. 
It  is  instructive  to  note  how,  through  the  inevitable  operation 
of  economic  law,  the  very  multiplication  of  tax-exempt  state  and 
municipal  bonds  is  gradually  defeating  the  object  of  the  ex- 
emption. The  greater  the  area  of  tax  exemption,  the  less  does 
its  influence  become. 

It  appears,  accordingly,  that,  under  present  American  condi- 
tions, exemption  from  a  tax  which  in  some  cases  amounts, 
nominally,  to  twenty-five  or  even  fifty  per  cent  of  the  income 
of  the  bonds  actually  makes  no  difference  in  their  market  value, 
or  a  difference  so  slight  as  to  be  negligible.  This  at  least  is 
the  result  of  the  exemption  of  state  and  municipal  bonds  from 
the  general  property  tax,  as  levied  in  the  American  states. 
Let  us  now  consider  the  bearing  of  this  fact  upon  the  results 
to  be  anticipated  from  the  imposition  of  a  federal  income  tax. 

The  income  tax  contemplated  by  the  constitutional  amend- 
ment is  very  different  from  the  general  property  tax.  A  gen- 
eral property  tax  of  two  per  cent  is,  we  have  seen,  equivalent 
to  a  fifty  per  cent  income  tax,  if  the  prevailing  rate  of  interest 
is  four  per  cent.  The  federal  income  tax  of  1894  provided  for 
a  tax,  not  of  fifty  per  cent,  but  of  two  per  cent.  If  a  tax  of 
fifty  per  cent  makes,  as  we  have  seen,  virtually  no  difference, 
what    significance    can   we   ascribe   to   a    tax   of   two   per   cent? 


IXXOME  TAX  123 

Even  if  we  assume  that  a  federal  income  tax  will  be  more  ef- 
fectively enforced  than  a  state  general  property  tax,  the  margin 
is  still  so  enormous  as  to  rob  the  income  tax  of  much  of  its 
supposed  danger.  The  practical  effect  of  subjecting  the  income 
of  state  or  municipal  bonds  to  federal  taxation  would  be  so 
slight  as  to  render  the  tax  virtually  innocuous. 

We  come  now,  however,  to  the  central  point  of  the  argument. 
In  the  entire  preceding  discussion  we  have  assumed  the  ex- 
istence of  an  exclusive  tax  or  of  a  special  exemption.  The 
theory  of  capitalization  or  amortization  applies  only  in  such 
cases.  If  a  special  tax  is  permanently  imposed  on  a  class  of 
property,  it  can  be  capitalized,  because  of  the  existence  of  a 
taxless  field  to  which  the  taxpayer  can  repair  and  in  which  he 
can  invest  his  money.  If  a  special  class  of  property  is  exempt 
from  taxation,  the  influence  will  be  felt  only  because  the  ex- 
emption applies  to  it  alone,  and  not  to  other  classes  of  property. 
But  if  the  tax  applies  to  all  classes  of  property  alike,  there  can 
be  no  amortization ;  and  if  the  exemption  applies  to  all  classes 
alike,  there  can  be  no  capitalization.  The  very  basis  of  the 
theory  is  the  e.xclusiveness  or  uniqueness  of  the  proceeding. 
When  a  tax  is  a  general  tax  and  not  an  exclusive  tax,  the  theory 
ceases  to  apply.  ^ 

(Now  the  income  tax  contemplated  by  the  amendment  is  not 
a  special  tax  but  a  general  tax.  By  the  very  terms  of  the 
amendment,  it  applies  to  all  kinds  of  income  from  whatever 
source  derived.  This  is  the  true  purpose  of  the  measure.  It 
is  conceded  that  if  a  special  tax  were  imposed  eo  nomine  on 
state  and  municipal  bonds,  it  would,  theoretically  at  least,  have 
some  influence  on  their  market  value,  although,  as  we  have 
seen,  the  practical  effect  of  such  a  tax  would  be  less  than  might 
be  expected.  But  if  incomes  derived  from  state  bonds  are 
taxed  at  the  same  rate  as  incomes  from  other  bonds,  how  can 
the  tax  have  any  influence  on  their  value?  There  is  no  taxless 
field  to  which  the  bondholder  can  repair  if  he  seeks  to  make  a 
different  investment.  In  whatever  kind  of  property  he  puts  his 
capital,  his  income  will  be  equally  diminished  by  the  tax.  But 
if  all  incomes  are  equally  diminished,   there  can  be  no  change 


124  SELECTED   ARTICLES 

brought  about  in  the  relative  superiority  or  inferiority  of  the 
different  sources  of  income.  If  five-percent  government  bonds 
are  selling  at  par,  and  if  a  general  income  tax  of  one  per  cent 
is  imposed  on  all  incomes,  the  price  of  government  bonds  as 
compared  with  other  securities  in  general  will  not  be  affected 
one  iota.  We  may  go  further  and  say  that  there  will  be  no 
change  at  all  in  the  actual  values  of  any  securities,  unless  the 
tax  is  so  high  as  to  cause  a  perceptible  exodus  of  capital  to  for- 
eign countries,  with  a  resulting  slight  change  in  the  domestic 
rate  of  interest,  which  change  in  the  rate  of  interest  would,  of 
course,  reflect  itself  in  the  market  values  of  the  securities. 

The  ordinary  view  is  to  be  traced  to  the  adoption  by  the 
Supreme  Court  of  what  is  mistakenly  conceived  to  be  the  opin- 
ion of  Chief  Justice  Marshall.  In  explaining  the  decision  of 
the  court  in  Weston  v.  Charleston,  Chief  Justice  Marshall  said : 
"The  right  to  tax  the  contract  to  any  extent,  when  made,  must 
operate  upon  the  power  to  borrow  before  it  is  exercised  and 
have  a  sensible  influence  on  the  contract."  And  again :  "To 
any  extent,  however  inconsiderable,  it  is  a  burthen  on  the  oper- 
ations of  government."  This  reasoning,  in  these  very  terms, 
was  applied  in  the  Pollock  case  to  the  federal  income  tax.  It 
is  evident,  however,  that  this  application  is  erroneous ;  for  if 
the  tax  is  a  part  of  a  general  income  tax  there  can  be  no  capi- 
talization and  no  change  in  the  value  of  the  bonds,  and  hence 
it  cannot  "operate  on  the  power  to  borrow"  and  cannot  "be  a 
burthen  on  the  operations  of  government."  Marshall's  state- 
ment was  justified,  in  the  case  which  he  had  before  him,  for 
two  reasons :  first,  because  the  tax  in  question  was,  in  part  at 
least,  eo  nomine  on  government  bonds,  and  secondly,  because  it 
was  a  state  tax  on  federal  securities.  In  the  Pollock  case,  how- 
ever, not  only  was  the  court  discussing  a  federal  tax  on  state 
bonds,  but  the  tax  in  question  was  a  general  tax.  Passing  over, 
for  the  moment,  the  distinction  between  a  state  tax  on  federal 
securities  and  a  federal  tax  on  state  securities,  which  will  be 
treated  below,  the  difference  between  a  special  tax  and  a  gen- 
eral tax  is  in  itself  sufificient  to  show  that  Marshall's  reasoning 
does   not   apply   to   the    Pollock   case.     In   this   latter   case,   the 


INCOME  TAX  125 

failure  of  the  court  to  estimate  the  inexorable  operation  of 
economic  law  led  it  astray ;  and  impHcit  reliance  on  the  economic 
views  of  our  later  jurists  has  misled  so  eminent  a  statesman  as 
Governor    Hughes. 

We  may  accord  the  fullest  authority  to  the  legal  reasoning  of 
the  Supreme  Court ;  but  when  a  legal  conclusion  is  based  on  an 
economic  argument  which  is  plainly  fallacious,  it  is  time  to  call 
a  halt.  In  this  instance  the  economic  reasoning  of  the  Supreme 
Court  is  so  obviously  defective  that  it  invalidates  the  entire  con- 
clusion. A  specific  and  exclusive  tax  on  state  bonds  would  in- 
deed have  the  consequences  ascribed  to  it  by  the  court;  a  gen- 
eral tax  could  not  possibly  have  those  consequences.  A  tax 
on  the  income  of  state  or  municipal  bonds  as  a  part  of  a  general 
income  tax  would  leave  everything  as  it  was  before  the  tax.  If 
the  operations  of  state  governments  were  previously  not  bur- 
thened,  they  would  not  be  burthcned  by  such  a  tax.  If  the 
power  of  the  state  to  contract  was  not  affected  before  the  impo- 
sition of  the  tax,  it  would  not  be  afifected  by  the  imposition  of 
the  tax.     The  economic  situation  would  be  unchanged. 

It  may  be  claimed,  however,  that,  even  if  the  preceding  argu- 
ment is  valid  and  even  though  state  and  municipal  bonds  will 
not  suffer  in  price  by  being  subjected  to  a  general  income  tax,  a 
special  exemption  of  state  and  municipal  bonds  from  taxation 
will  enhance  their  price.  Therefore  a  failure  to  exempt  them 
might  be  regarded  as  virtually  tantamount  to  an  attack  on  the 
state's  credit.    This  claim  is  specious,  but  it  is  not  valid. 

In  the  first  place,  the  actual  enhancement  of  prices  due  to 
special  exemption  will  be  far  less  than  is  usually  imagined;  for 
not  only  will  an  income  tax  or  an  exemption  from  such  a  tax 
have,  as  pointed  out  above,  no  significant  influence  on  the  cap- 
ital value  of  the  security,  but  the  mere  fact  of  the  general 
exemption  of  all  state  and  municipal  bonds  would,  in  itself,  tend 
to  minimize  even  this  slight  influence.  The  exemption  of  the 
bonds  of  a  particular  municipality  might  well  be  expected  to 
exert  an  influ(?nce  on  their  price.  But  in  proportion  as  other 
municipal  bonds  in  the  state,  and  state  and  local  securities  in 
other  states,  come   to  enjoy  the   same   privilege,  the  advantage 


126  SELECTED  ARTICLES 

would  tend  to  be  neutralized.  If  the  exemption  were  to  apply 
to  all  state  and  local  bonds,  amounting  to  many  hundreds,  or 
perhaps  in  the  near  future  even  thousands,  of  millions  of  dollars, 
we  should  see  the  same  development  which,  as  explained  above, 
has  actually  worn  away  the  original  advantage  attaching  to  the 
tax-exempt  bonds  of  New  York  City.  The  broader  the  ex- 
emption area,  the  less  the  value  of  the  exemption. 

The  argument  that  tax  exemption  is  especially  needed  in 
times  of  crisis  is  thus  robbed  of  most  of  its  force;  for  if  tax 
exemption  has  little  value  under  normal  conditions,  it  can  have 
no  great  value  in  times  of  crisis.  At  such  times,  indeed,  it  will 
have  no  value;  for  in  crises  bonds  are  almost  completely  un- 
salable. The  drop  in  their  price  is  so  great  that  the  question  of 
their  taxation  or  exemption  becomes  immaterial. 

It  may  be  urged,  further,  that  even  if  the  exemption  of  state 
securities  from  a  federal  income  tax  were  of  real  advantage  to 
the  states,  there  seems  to  be  no  reason  why  the  federal  govern- 
ment should  confer  upon  them  this  advantage.  The  constitu- 
tional inhibition,  if  it  means  anything,  means  only  that  the 
national  government  shall  not  discriminate  against  the  states  by 
injuring  their  power  to  borrow.  It  does  not  mean  that  the 
national  government  should  discriminate  in  favor  of  the  states 
by  enhancing  their  power  to  borrow.  A  special  exemption  of 
state  bonds  from  a  general  income  tax  would,  if  it  increased 
the  market  price  of  these  securities,  be  tantamount  to  a  gift 
from  the  national  government  to  the  state  government.  Such 
a  relation,  however,  is  not  contemplated  by  the  Constitution. 
It  is  not  the  function  or  the  province  of  the  national  govern- 
ment to  confer  gifts  or  favors  upon  the  state  governments.  The 
states  can  look  after  themselves,  and  all  that  they  have  a  right 
to  ask  from  the  national  government  is  that  there  shall  be  no 
unconstitutional  interference  with  their  powers.  Equality  under 
the  Constitution  they  have  a  right  to  claim ;  special  favors  they 
have  no  right  to  demand. 

Moreover,  such  an  exemption  of  state  and  municipal  bonds 
would  be  inconvenient  to  the  national  government  and  unjust 
to  the  individual  citizen.     Federal  securities  have  at  times  been 


INCOME  TAX  127 

taxed  by  the  federal  government.  It  may  again  become  de- 
sirable that  they  shall  be  so  taxed ;  all  the  important  European 
countries  now  find  it  on  the  whole  advisable  to  tax  their 
own  securities.  If  the  bonds  of  the  United  States  were  taxed 
under  a  general  income-tax  law,  and  if  at  the  same  time 
state  and  municipal  bonds  were  exempt,  it  will  be  readily 
seen  that  this  would  in  effect  be  subordinating  the  credit  of  the 
United  States  to  that  of  the  local  divisions.  Such  a  contingency 
can  be  contemplated  only  with  apprehension.  Of  still  greater 
importance  is  the  consideration  that,  if  state  and  local  bonds 
were  especially  exempt  as  over  against  the  whole  mass  of  private 
and  corporate  securities,  the  individual  citizen  would  have  a 
just  cause  for  complaint.  Not  only  would  it  mean  an  escape 
from  taxation  for  all  those  who  chose  to  invest  in  state  or 
local  bonds,  but,  if  the  advantage  were  at  all  appreciable,  the 
increasing  demand  for  these  state  and  local  bonds  would  mean 
such  a  transfer  of  investments  as  to  cause  a  sensible  depreciation 
in  the  market  value  of  other  securities,  and  the  unfortunate 
possessors  of  those  other  securities  would  have  to  suffer  a  loss, 
the  corresponding  gain  accruing  to  the  happy  possessors  of  the 
tax-exempt    state    and    local    bonds. 

Thus,  from  every  point  of  view,  the  special  exemption  of 
state  bonds  from  a  general  income  tax  is  indefensible.  It 
would  in  all  likelihood  not  accomplish  the  object  which  it  is 
designed  to  attain  ;  but  in  so  far  as  it  did  accomplish  this  ob- 
ject, it  would  create  a  glaring  inequality,  inimical  alike  to  the 
maintenance  of  the  national  credit  and  to  the  interests  of  the 
mass  of  the  individual  taxpayers. 


Ill 

We  come  now  to  the  final  consideration.  Even  if  it  were 
true,  as  it  is  not,  that  the  proposed  constitutional  amendment 
empowers  the  national  government  to  tax  the  income  of  state 
t)onds,  there  are  valid  reasons  to  justify  such  a  change  in  the 
law.  Even  if  the  amendment  may  be  so  interpreted  as  to  give 
the  federal  government  this  new  power,  it  ought  still  to  prevail. 


128  SELECTED  ARTICLES 

On  what  ground,  however,  it  may  be  asked,  can  we  defend 
the  immunity  of  national  bonds  from  state  taxation,  and  at  the 
same  time  uphold  the  possible  legitimacy  of  the  federal  taxa- 
tion of  state  bonds?  Does  not  the  same  principle,  the  inde- 
pendence of  each  government  within  its  own  sphere,  apply  in 
both  cases?     Let  us  look  into  this  question. 

If  we  examine  the  successive  legal  decisions  on  the  subject, 
we  shall  find  that  there  have  been  three  stages  in  the  develop- 
ment of  the  doctrine  that  the  states  may  not  tax  the  agencies  of 
federal  government.  In  the  case  of  McCulloch  v.  Maryland, 
in  1819,  the  objection  was  to  a  special  and  exclusive  state  tax 
on  an  agency  of  the  federal  government ;  for  the  tax  in  ques- 
tion was  levied  on  "all  banks,  or  branches  thereof,  in  the  state 
of  Maryland,  not  chartered  by  the  legislature."  and  the  only 
bank  at  that  time  fitting  the  description  was  the  Bank  of  the 
United  States.  In  the  case  of  Weston  v.  Charleston,  in  1829, 
the  second  step  was  taken  by  declaring  unconstitutional  a  state 
or  local  tax  which  was  indeed  not  exclusively  levied  on  the 
instrumentalities  of  the  national  government,  but  which  spe- 
cifically and  by  name  included  federal  bonds  in  a  list  of  taxable 
securities.  The  third  and  final  stage  was  reached  in  the  case  of 
Dobbins  v.  Commissioners  of  Erie  County,  decided  in  1842, 
in  which  it  was  held  that  a  local  tax,  entirely  general  in  char- 
acter and  making  no  special  mention  of  government  salaries, 
was  nevertheless  invalid  so  far  as  it  alYected  the  salaries  of  fed- 
eral officers.  And  in  the  same  way,  a  few  decades  later,  in 
1862,  it  was  decided  in  Bank  of  Commerce  v.  New  York  City 
that  a  state  tax  on  federal  bonds  was  unconstitutional  even  if 
the  tax  were  entirely  general  in  character  and  did  not  mention 
federal  bonds  at  all.  Thus  we  have  a  gradual  evolution  of  the 
doctrine,  from  the  initial  stage  of  exclusive  taxation  through 
that  of  specific  mention  to  the  final  stage  of  general  taxation. 

On  the  other  hand,  in  the  reverse  case  of  the  attempt  of  the 
federal  government  to  tax  state  agencies,  there  was  no  such 
gradual  evolution  of  the  doctrine.  The  theory  which  had 
reached  its  complete  formulation  in  1842  and  in  1862,  with 
reference  to  state  taxation  of  federal  agencies,  was  now,  in  1870, 


INCOME  TAX  121) 

taken  over  bodily  to  apply  to  the  federal  taxation  of  state 
agencies.  In  the  case  of  Collector  v.  Day  it  was  decided  that  a 
general  federal  income  tax  was  unconstitutional  so  far  as  the 
salaries  of  state  judicial  officers  were  concerned,  even  though 
they  were  not  at  all  specifically  mentioned  in  the  law.  And  in 
the  Pollock  case  this  reasoning  was  applied  to  a  general  federal 
income  tax  so  far  as  it  reached  the  income  of  municipal  bonds. 

On  what  grounds,  now,  can  we  justify  the  rule  of  non-inter- 
ference with  agencies  of  government  in  the  first  set  of  cases  and 
withhold  our  approval  from  its  application  to  the  second  set  of 
cases?  It  may  at  once  be  conceded  that  a  tax  on  the  agencies 
of  state  government  which  really  impairs  the  operations  of  state 
government  would  be  just  as  obnoxious  to  the  Constitution  as  a 
similar  state  tax  on  federal  agencies.  It  may  further  be  con- 
ceded that  a  special  federal  tax  on  state  bonds  or  on  the  income 
of  state  bonds  would  be  just  as  indefensible  as  a  similar  state 
tax  on  federal  bonds.  The  question  at  issue,  however,  is  a 
different  one — it  is  whether  the  taxation  of  federal  bonds  under 
a  general  state  tax  law  is  to  be  in  the  same  category  as  the 
taxation  of  state  bonds  under  a  general  federal  tax  law.  In  my 
opinion  the  two  cases  are  not  on  a  par,  and  for  the  two  follow- 
ing reasons,  the  one  political,  the  other  economic. 

The  political  ground  on  which  a  distinction  may  be  drawn 
between  tlie  two  cases  is  this :  A  state  legislature  may  fre- 
quently find  it  in  the  interest  of  the  state  to  follow  a  policy 
which  is  different  from  that  of  other  states,  and  which  may  even 
be  distinctly  opposed  to  that  followed  in  federal  legislation. 
The  states,  acting  through  their  legislatures,  may  regard  only 
their  peculiar  narrow  interests  and  may  consider  them  superior 
to  those  of  the  country  as  a  whole.  On  the  other  hand.  Con- 
gress is  composed  of  representatives  from  all  the  states,  and  in 
the  Senate,  in  particular,  equal  voice  is  given  to  the  wishes  of 
each  state.  There  is  hence  no  likelihood  of  a  federal  tax  law 
interfering  with  the  states,  except  where  it  is  the  well-consid- 
ered opinion  of  a  majority  of  all  the  states  that  the  interests  of 
any  particular  state  ought  to  be  subordinated  to  the  welfare  of 
the  whole.    In  other  words,  while  the  federal  government  would. 


130  SELECTED   ARTICLES 

without  the  restrictions  which  the  Supreme  Court  has  read  into 
the  Constitution,  have  no  protection  against  hostile  action  on  the 
part  of  state  legislatures,  the  state  governments  have,  from  the 
very  nature  of  the  case,  a  far  greater  measure  of  protection 
against  the  acts  of  Congress. 

It  must,  moreover,  not  be  overlooked  that  all  sound  consti- 
tutional interpretation  should  keep  pace  with  the  changing  needs 
of  political  and  social  life.  The  conditions  which  existed  when 
the  Constitution  was  framed  are  no  longer  existent.  At  that 
time  the  political  and  economic  interests  of  the  separate  states 
were  so  distinct  and  the  sense  of  state  sovereignty  was  so  strong 
that  it  was  only  with  extreme  difficulty  that  a  federal  govern- 
ment was  established  at  all.  During  the  last  century,  however, 
the  development  of  the  underlying  economic  and  social  forces 
has  created  a  nation,  and  this  development  calls  for  uniform  na- 
tional regulation  of  many  matters  which  were  not  dreamed  of  by 
the  founders.  In  all  the  federal  states  which  have  been  created 
during  the  nineteenth  century,  under  the  influence  of  these 
newer  economic  forces,  in  Canada,  in  Germany,  in  Australia 
and  in  South  Africa,  we  find  no  such  problems  as  those  which 
vex  us,  because  of  the  greater  authority  initially  granted  to  the 
central  government.  In  Canada,  for  instance,  we  find  just  the 
reverse  of  our  system.  With  us  all  powers  not  expressly  con- 
ferred upon  the  federal  government  are  reserved  to  the  states 
or  to  the  people  :  in  Canada  the  powers  not  expressly  conferred 
on  the  states  or  provinces  are  reserved  to  the  federal  govern- 
ment. It  is  idle  to  say  that  this  centralization  of  powers,  where 
centralization  is  needed,  is  injurious  either  to  democracy  or  to 
self-government.  There  is  at  least  as  much  true  democracy  and 
as  much  real  self-government  in  Canada  and  in  Australia  as  there 
is  in  the  United  States.  Let  us  not  make  a  fetich  of  "self- 
government."  and  let  us  not  oppose  central  authority  in  those 
cases  where  self-government  means  retrogression  rather  than 
progress. 

The  Supreme  Court  of  the  United  States  has  already  been 
influenced  by  these  considerations.  In  the  case  of  Veazie 
Bank  v.   Fenno   it   was   held   that  a   federal   tax   on   state  bank 


INCOME  TAX  131 

notes  was  valid,  because  of  the  necessity  of  upholding  a  national 
s\-stem  of  currency.  In  the  recent  and  very  important  case  of 
South  Carolina  v.  United  States  it  was  held  that  a  federal  tax 
on  a  state  dispensary  was  constitutional.  On  the  other  hand  it 
is  certain  that  the  Supreme  Court  would  never  uphold  the 
validity,  without  the  express  consent  of  Congress,  either  of  a 
state  tax  on  national  bank  notes  or  of  a  state  tax  on  a  federal 
business  or  a  federal  monopoly.  In  other  words,  we  are  grad- 
ually working  out,  in  detail,  the  distinction  that  Marshall  form- 
ulated many  years  ago  in  McCulloch  t'.  Maryland:  "The  dif- 
ference is  that  which  always  exists  and  always  must  exist 
between  the  action  of  the  whole  on  a  part  and  the  action  of  a 
part  on  the  whole."'  Sooner  or  later  it  will  be  realized  that  this 
distinction  applies  also  as  between  a  state  tax  on  federal  bonds 
and  a  federal  tax  on  state  bonds.  Sooner  or  later  we  shall  out- 
grow many  of  the  notions  of  extreme  individualism  and  of  ex- 
aggerated state  rights  which  dominated  the  country  at  the  time 
of  the  formation  of  the  Constitution.  They  are  bound  to  dis- 
appear in  the  United  States  as  they  have  disappeared  in  every 
other  great  federal  republic. 

If  this  political  argument  does  not  appeal  to  those  who  are 
still  enmeshed  in  the  web  of  extreme  individualism  and  exag- 
gerated state  rights,  there  remains  another  argument  of  an 
economic  character  which  is  of  decisive  importance.  Even 
though  we  assume  that  from  the  political  point  of  view  no  dis- 
tinction ought  to  be  made  in  the  matter  of  taxation  between  the 
state  and  the  national  government,  it  is  susceptible  of  proof 
that  valid  economic  reasons  will  justify  the  distinction  between 
a  general  state  tax  on  federal  bonds  and  a  general  federal  tax 
on  state  bonds.  The  general  state  tax  to  which  allusion  is 
made  is  the  general  property  tax.  The  general  federal  tax  to 
which  allusion  is  made  is  the  general  income  tax.  Now  a  state 
tax  on  government  bonds,  as  part  of  a  general  property  tax,  not 
only  is  unconstitutional  but  ought  always  to  remain  unconstitu- 
tional. State  A.  which  imposes  the  tax  in  question,  would  of 
course,  from  the  very  nature  of  the  case,  tax  all  other  monied 
capital  as  well  as  the  capital  invested  in   federal  bonds.   Rut  its 


132  SELECTED  ARTICLES 

neighbor  state  B  might  see  fit  not  to  impose  a  general  property 
tax.  There  are  several  states  in  the  Union  which  to-day  do  not 
impose  a  general  property  tax.  Or,  even  if  state  B  imposed  a 
general  property  tax,  its  methods  of  assessment  might  be  so 
lax  that  it  would  not  reach  all  other  monied  capital.  Conse- 
quently, if  state  A  included  government  bonds  in  its  taxable 
general  property  and  actually  assesssed  the  bonds,  the  bonds 
would  undoubtedly  be  affected  in  value  through  the  lack  of  uni- 
formity in  the  various  states.  The  power  of  the  general  gov- 
ernment to  borrow  money  might  thus  be  seriously  impaired, 
and  this  risk  would,  beyond  cavil,  constitute  a  sufficient  reason 
for  withholding  the  power  from  the  states.  On  the  other  hand, 
if  the  federal  government  were  to  impose  a  general  income  tax 
which,  under  the  very  terms  of  the  Constitution,  must  neces- 
sarily be  uniform  throughout  the  country,  the  income  from 
state  bonds  would  be  reached  in  precisely  the  same  way  as  the 
income  from  all  other  monied  capital,  and,  as  I  have  abundantly 
shown  above,  there  would  be  no  alteration  in  the  value  of  the 
bonds  and  therefore  no  influence  exerted  on  the  power  of  the 
states  to  borrow. 

The  Supreme  Court  of  the  United  States  went  off  on  a  wrong 
tack,  not  in  the  case  of  Dobbins  v.  Commissioners  in  1842,  but 
in  the  case  of  Collector  v.  Day  in  1870.  The  cases,  from  the 
economic  point  of  view,  were  not  on  a  parity.  Had  Collector 
r.  Day  presented  a  situation  like  that  in  ^vlcCulloch  v.  Mary- 
land, i.  e..  had  it  been  a  question  of  an  exclusive  federal  tax 
comparable  to  the  exclusive  state  tax,  the  economic  basis  of  the 
argument  would  have  been  the  same.  But  when  Collector  v. 
Day  attempted  to  apply  by  inversion  Dobbins  v.  Commission- 
ers— when,  in  other  words,  a  general  federal  tax  was  declared 
equivalent  to  a  general  state  tax — the  judges  were  misled  by  a 
superficial  analogy  which  had  no  basis  in  economic  fact.  In 
the  same  way  the  Supreme  Court  erred  when,  in  deciding  the 
first  Pollock  case,  it  thought  that  it  was  applying  the  principle 
involved  in  Weston  v.  Charleston.  Weston  v.  Charleston  dealt 
with  a  state  ta.x  on  federal  securities  ;  the  Pollock  case  involved 
the  question   of  a   federal  tax   on   state   securities.     As   we  have 


IN' COME  TAX  133 

seen,  the  economic  conclusions  which  apply  in  the  one  case  do 
not  appl)-  in  the  other. 

In  the  long  run.  however,  the  economic  interests  of  a  com- 
munity must  prevail :  for  law  is  nothing  but  the  crystallization 
of  economic  and  social  imperatives.  Sooner  or  later,  therefore, 
the  underlying  fallacy  in  the  more  recent  decisions  of  the 
Supreme  Court  will  be  recognized  by  the  court  itself,  or  the 
mistake  will  be  corrected  by  constitutional  amendment.  The 
law  cannot  permanently  lag  behind  the  economic  truth. 

Entirely  apart  therefore  from  any  legal  or  political  consider- 
ations that  might  be  invoked,  an  economic  analysis  shows  clearly 
that  the  inclusion  of  state  bonds  under  a  general  federal  tax  is 
a  very  different  thing  from  the  inclusion  of  federal  bonds  under 
a  general  state  tax.  Since  the  economic  results  are  or  may  be 
so  entirely  different,  the  legitimacy  of  the  action  of  the  respec- 
tive governments  is  entirely  different.  From  the  economic 
point  of  view  the  states  ought  not  to  have  the  right  to  tax  the 
bonds  of  the  federal  govenment  at  all ;  but  the  federal  govern- 
ment might  well  be  justitied  in  including  state  bonds  in  a  gen- 
eral income  tax.  Hence,  even  if  the  constitutional  amendment 
were  to  have  the  legal  consequences  which  are  predicated  of  it, ' 
it  ought  still  to  prevail,  in  order  to  subserve  the  best  economic 
interests  of  the  whole  country. 

IV. 

In  order  thoroughly  to  discuss  all  the  problems  raised  by  the 
constitutional  amendment  it  would  be  necessary  to  go  at  some 
length  into  two  further  problems:  first,  to  what  extent  is  the 
taxation  of  government  securities  advisable,  even  by  the  power 
that  issues  them?  and  secondly,  how  far  is  the  general  scheme 
of  an  income  tax  in  itself  to  Ije  welcomed?  These  matters, 
however,  would  lead  us  too  far  astray,  and  they  have,  strictly 
speaking,  only  an  indirect  connection  with  the  specific  questions 
that  are  raised  by  the  amendment.  It  may  be  stated,  however, 
that  in  so  far  as  the  question  of  the  taxation  of  government 
bonds  is  concerned,  there  are  good  arguments  on  both  sides, 
and   that   this   question    finally   resolves   itself    int<j   a   choice   be- 


134  SELECTED  ARTICLES 

tween  upholding  the  credit  of  the  government  and  maintaining 
exact  impartiahty  as  between  individual  taxpayers.  Most  of 
the  European  countries,  after  a  long  period  of  wavering,  have 
now  come  to  the  conclusion  that  the  exemption  of  the  government 
securities  from  the  income  tax  is  on  the  whole  inadvisable,  and 
they  are  willing  to  subordinate  the  slight  advantages  which 
would  accrue  to  the  borrowing  power  of  the  government  to 
what  they  conceive  to  be  the  far  greater  benefit  of  complete 
uniformity  and  equality  as  among  the  various  classes  of  tax- 
payers. The  tendency  throughout  the  civilized  world  is  away 
from,  and  not  in  the  direction  of,  the  exemption  of  govern- 
ment securities.  * 

So  far  as  the  problem  of  a  general  income  tax  is  concerned, 
there  is  perhaps  less  room  for  discussion.  Many  thoughtful 
citizens,  indeed,  may  still  have  their  doubts  as  to  the  practicabil- 
ity of  an  income  tax  and  as  to  the  possibility  of  the  United 
States  government  creating  a  really  successful  income-tax  meas- 
ure. But  all  these-  doubts  must  fade  away  when  the  question 
is  presented  in  all  its  baldness :  "Shall  the  government  of  the 
United  States  be  precluded  from  even  making  the  attempt  to 
levy  an  income  tax?"  To  deny  to  a  great  empire  like  the 
United  States  the  possibility  of  utilizing  so  powerful  a  fiscal 
engine  in  times  of  national  stress  would  be  almost  equivalent  to 
advocating  national  suicide.  At  all  events,  it  amounts  to  a 
deliberate  decision  to  put  the  national  government  at  an  enor- 
mous disadvantage  at  the  very  times  when  no  possible  advantage 
can  safely  be  neglected.  To  withhold  from  the  government  of 
the  United  States  a  power  which  is  possessed  by  the  smallest 
of  its  competitors  would  be  a  monstrous  folly. 

Whether  an  income  tax  is  a  desirable  supplement  to  the 
ordinary  tax  system  of  the  United  States  in  times  of  peace  is  a 
far-reaching  question  which  need  not  be  discussed  in  this  place. 
That,  after  all,  is  a  matter  for  the  legally  constituted  repre- 
sentatives of  the  nation  to  determine.  But  surely  no  patriot  can 
afford  to  object  to  conferring  upon  the  United  States  a  power 
which  until  recently  it  was  always  supposed  to  possess,  and  with- 
out  which,   its   prosperity — nay,   even,   its   very   existence— might 


INCOME  TAX  135 

possibly  be  menaced.  The  pending  constitutional  amendment 
seeks  to  secure  this  result,  and  its  adoption  ought  not  to  be  im- 
peded by  arguments  that  place  upon  it  an  erroneous  interpretation 
and  conjure  up  dangers  which  a  more  careful  economic  analysis 
shows  to  be  wholly  non-existent.  The  pending  constitutional 
amendment  is  not  only  legally  defensible  and  politically  in- 
nocuous, but  it  is,  above  all,  economically  sound.  It  is  therefore 
from  every  point  of  view  eminently  desirable. 


Public  Opinion.  15:  193-4.  May  27,  1893. 
Income  Tax. 

Of  all  the  modes  of  raising  public  revenue,  there  is  none 
so  odious  to  the  American  people  as  is  a  tax  on  incomes.  Dur- 
ing the  financial  stress  of  the  Civil  War  this  tax  was  the  last 
to  be  levied,  and  the  first  to  be  repealed  after  a  brief  experience 
of  its  operation.  The  popular  hostility  to  the  tax  is  not  merely 
because  of  its  inquisitorial  character,  but  because  of  its  tendency 
to  divide  the  people  into  two  great  and  widely  separated  classes 
— the  paying  and  nonpaying,  the  having  and  the  not-having 
class. 

If  all  men  should  be  truthful  there  would  be  no  difficulty  in 
collecting  a  tax  on  incomes  without  inquisitorial  appliances. 
But  as  all  men  would  not  be  truthful,  a  portion  only  would  pay 
the  tax,  while  no  application  of  the  governmental  thumb-screw 
could  wrest  it  from  those  who  might  desire  to  conceal  the 
amount  of  their  incomes.  There  is  not  so  much  honesty  ex- 
tant as  to  make  it  wise  to  put  a  government  premium  on  lying 
and  perjury.  Experience  has  shown  that  men  held  as  honest 
and  fair-dealing  with  their  neighbors  have  been  converted  into 
prevaricators  and  sneaks  in  their  desire  to  conceal  the  extent 
of  their  incomes  from  the  government  inquisitor.  Any  measure 
that  invites  and  encourages  the  spread  f)f  immorality  in  the 
state  is  itself  immoral.  But  even  if  the  income  tax  should 
have  no  such  effect,  the  tendency  to  class  distinction  based 
on   wealth,   which   is   already   too   great,   would   unquestionably 


136  SELECTED  ARTICLES 

receive  a  mighty  impulse  from  this  measure.  Under  its  operation 
the  citizens  would  be  divided  into  two  great  bodies — the  payers 
and  nonpayers  of  income  tax.  In  a  republic  men  are  all  equal ; 
but  there  could  be  no  genuine  political  equality  under  a  system 
which  should  divide  the  citizens  into  two  classes  based  on  the 
distinction  of  wealth.  The  payers  of  revenue  would  soon  in- 
sist upon  an  influence  in  the  government  proportionate  to  their 
contributions,  and  many  of  the  nonpayers  would  hasten  to  ad- 
mit the  justice  of  the  claim. 


Public  Opinion.  15:  264-6.  June  17,  1893. 

Income  Tax. 

If  incomes  are  to  be  taxed  let  them  all,  each  for  itself, 
contribute  a  fair  share  and  part  of  the  general  amount.  Under 
no  other  condition  can  a  tax  on  incomes  be  justified.  It  is 
the  first  law  of  all  equitable  taxation  that  it  shall  be  without 
discrimination,  that  it  shall  be  uniform.  An  income  tax  levied 
only  upon  a  single  class,  and  that  class  largely  distinguished  for 
its  achievements  in  building  up  the  wealth,  power,  and  dignity 
of  the  nation,  and  especially  for  providing  incomes  to  the  mil- 
lions to  whom  it  gives  employment,  is  a  tax  which  only  the 
most  forbidding  spirit  of  socialism  can  defend  in  a  country 
like  this,  the  government  of  which  is  of  all  the  people,  by  all 
the  people  and  for  all  the  people.  Class  legislation  is  native 
to  the  monarchical,  not  the  democratic  form  of  government. 
Class  distinctions  of  any  kind  are  not  wanted  here,  and  there 
can  be  none  which  is  more  out  of  sorts  with  American  institu- 
tions than  an  income  tax  imposed  solely  upon  those  who  achieve 
wealth  by  honorable,  useful  efforts,  all  which  are  of  advantage 
to  the  country.  The  conclusive  argument  against  such  a  tax 
is  happily  furnished  by  its  supporters  when  they  support  it, 
as  they  do,  upon  the  broadest,  clearest  socialistic  grounds. 


INCOME  TAX  137 

Quarterly  Review.  206:  331-53.  April,  1907. 
Income  Tax.      Benjamin  Taylor. 

Graduation  is  not  held  to  apply  to  a  tax  which  is  merely 
proportional  to  the  net  assessable  income,  and  is  levied  at  a 
constant  rate,  irrespective  of  the  amount  of  the  income.  It 
is  taken  to  imply  a  variation  or  progression  in  the  rate  itself 
having  some  relation  to  the  amount  of  the  income  taxed.  Be- 
tween a  "proportional"  and  a  "progressive"  system  of  taxation 
there  is,  however,  in  practice  frequently  no  material  difference. 
Whether  a  tax  is  described  as  "proportional"  or  "progressive" 
depends  on  whether  the  proportional  or  the  progressive  rate  is 
regarded  as  the  normal  rate ;  and  this  again  depends  upon  the 
point  to  which  progression  is  carried  in  any  particular  instance. 
Most  of  the  systems  described  in  the  reports  would  be  classed 
as  progressive,  although  the  progression  generally  stops  at 
some  point  or  other,  after  which  the  rate  becomes  proportional 
merely.  The  leading  principle,  however,  is  to  impose  higher 
rates  as  the  income  increases,  so  as  to  throw  a  more  than  pro- 
portional burden  upon  the  wealthier  classes. 

Graduation  in  this  sense  is  effected  in  the  systems  described 
by  a  regular  progressive  scale,  the  main  forms  of  which  may 
be  classified  under  three  heads : 

(a)  The  taxpayers  are  arranged  in  a  number  of  categories  ac- 
cording to  the  amount  of  income  returned  by  or  ascribed  to  them, 
and  a  definite  sum  of  money  fixed  as  the  tax  in  eacli  category, 
which  is  not  subject  to  variation  from  yoar  to  year.  The  number 
of  categories  is  very  large  (generally  well  over  one  liundred),  and 
the  rate  of  progression  very  gradual.  This  system  is  characteristic 
of  the  German  group  of  taxes  including  the  Austrian;  and  all  the 
German  income  taxes  .  .  .  (except  the  Bavarian  unearned  income 
tax  and  the  Baden  tax)  afford  examples  of  it.  A  variation  of  this 
method  is  to  be  found  in  some  of  the  smaller  states,  e.  g.,  Anhalt 
and  Lippe-lJetmold  and  Hamburg,  where  the  definite  money  rate 
fixed  for  each  category  is  a  unit  or  standard  merely,  any  multiple 
of  which  may  be  levied  in  any  year  as  revenue  i-e<iuires.  lint  a 
noticeable  point  about  the  continental  income  taxes  as  a  whole  is 
that  the  rates  are  laid  down  once  for  all  in  the  law  instituting  the 
tax. 

(b)  The  taxpayers  are  arranged  In  categories,  and  each  cate- 
gory is  taxed  at  a  certain  percentage  rate,  the  rate  rising  with  each 
category  till  the  limit  of  progression  is  reached.  Under  this  system 
the  categories  are  few  in  number;  and,  as  within  the  limits  of  each 
category  the  charge  rises  proportionally  only,  and  a  progressive 
rise  only  occurs  at  a  few  specified  points,  the  progression  appears 
to  be  less  evenly  diffused   over  the   whole  range   of  Incomes.     The 


138  SELECTED  ARTICLES 


chief  examples  of  this  method  are  found  among  the  Swiss  cantons, 
e.  g.  Uri,  Appenzell  (Rhodes  Exterieurs),  Vaud  (with  seven  cate- 
gories), Bale-ville,  and  Lucerne  (with  three  categories);  Denmarl< 
(with  thirteen  categories)  is  another  instance  of  it.  A  variation  of 
this  system  is  that  existing  in  some  Swiss  cantons  such  as  Bale- 
ville,  where  each  portion  of  the  income  is  taxed  only  at  the  rate 
applicable  to  it,  the  first  4000  fr.  at  1%,  the  next  4000  fr.  at  2% 
and  so  on.  This  has  the  effect  of  further  diffusing  the  progression, 
(c)  Other  varieties  which  may  be  grouped  under  one  head  are 
those  in  which  a  scale  of  progression  is  based  upon,  or  combined 
with,  the  partial  exemption  of  Income  from  taxation  technically 
known  as  "abatement."  Scandinavia  and  Holland  are  the  chief 
examples  under  this  head.  In  Norway  and  Holland  the  system  de- 
pends on  abatement  combined  with  a  fixed  percentage  rate  of  tax 
up  to  a  certain  limit,  portions  of  income  beyond  that  limit  being 
taxed  at  a  higher  rate  or  rates.  This  insures  stronger  progression 
in  the  lower  grades.  In  Baden,  where  the  system  is  similar,  the 
progressive  rates  apply  to  the  whole  of  the  income  and  not  merely 
to  the  portions  above  the  specified  limits.  In  Denmark  abatement 
is  combined  with  percentage  progression.  An  example  of  the  man- 
ner in  which  exemption  or  abatement  is  utilised  to  transform  a 
proportional  into  a  progressive  rate  is  afforded  by  the  system  in 
force  in  the  canton  of  Neuchatel.  The  rate  of  the  tax  is  fixed  at 
1.20%  but,  as  a  sum  of  600  fr.  is  allowed  to  be  deducted  from  every 
taxable  income,  the  rate  varies  from  say,  0.30%  on  an  income  of 
800  fr.,  to  0.48%  on  one  of  1000  fr.,  1.13%  on  an  income  of  10,000  fr., 
and  so  on  until,  when  an  income  of  400,000  fr.  is  reached,  the  full 
1.207c  rate  is  practically  charged.  Zurich,  among  others,  affords  a 
somewhat  similar  example  of  "abatement."     (CD.  2587,  p.  vi.) 

The  exemption  of  a  certain  minimum  income  (the  "mini- 
mum of  subsistence")  is  recognised  in  most  fiscal  systems.  The 
limit  of  exemption  for  income  tax  purposes  is  fixed : 

£.    s.  d. 

In  Prussia  at   50  0  0  per  annum 

In  Austria  at   50  0  0  per  annum 

In   Holland   at    54  0  0  per  annum 

In   Norway  at    18  0  0  per  annum 

In    Sweden   at    24  5  0  per  annum 

33  0  0  per  annum 

In  Denmark  (according  to  locality)  at 39  0  0  per  annum 

44  0  0  per  annum 

In   Italy  at    16  0  0  per  annum 

In  Spain  (for  private  individuals)  at 45  0  0  per  annum 

And   (for  state  employes)   at 31  0  0  per  annum 

Some   of   the   rates   of   graduation   in    force   may   be  briefly 

mentioned.     In  Prussia  the  rate  commences  at  0.67%  on  45/.     It 

rises   gradually   to   1%   on  60/.,   2%    on   150/.,   3'/^    on   500/..   and 

reaches   the  maximum  of  4%   at  incomes  exceeding  5000/.     In 

Saxony  the  rate  commences  at  0.25%  on  20/.     It  rises  gradually 

to   1%  on  50/.,  2%  on   140/.,  3%   on  about  260/.,  4%  on  about 

1600/.,   and  reaches  the  maximum  of  5%   at  incomes   of  5000/. 

and  over.     In  Austria  the  rate  commences  at  0.6%  on  52I.     It 

rises  gradually  to  1%  on   1000/.,  2%  300/.,  3%  on  about  1000/., 


INCOME  TAX  139 

4%  on  about  4000/.  The  maximum  of  nearly  5%  is  reached  only 
for  very  large  incomes.  In  Sweden  the  rate  commences  at 
0.2%  on  about  55/.  It  thence  increases  gradually  to  1%  on  about 
277/.,  27o  on  about  1417/.,  37c  on  about  3666/.,  and  reaches  the 
maximum  of  47c  on  an  income  of  about  8083/.  But  there  is  a 
'general  supply'  tax  which  levies  1%  on  incomes  assessed  to 
the  income  tax.  In  Denmark  the  rate  commences  at  1.3%  on 
about  39/.  It  then  rises  in  seven  stages  to  2%  on  incomes  of 
from  833/.  to  mo/.,  and  reaches  the  maximum  of  2^%  in  five 
further  stages  for  incomes  of  5500/.  and  over. 

In  all  these  States  the  progression  is  a  gradual  one,  on  an 
average  ranging  from  about  0.6%  on  a  labourer's  income  to  a 
maximum  of  4  or  5%  (say  lod.  or  is.  in  the  i)  on  incomes  of 
the  richest  classes.  In  Hamburg  the  maximum  has  in  some 
recent  years  reached  6%,  while  in  Baden  the  maximum  is  only 
3y2%.  The  progression  is  most  rapid  in  the  early  stages;  a 
rate  of  1%  or  114%  is  usually  reached  for  an  income  of  100/. 
An  income  of  200/.  pays  on  the  average  nearly  2%,  say  4^d.  in 
the  pound ;  after  the  2%  rate  is  passed  the  progression  becomes 
slower.  In  Prussia  an  income  of  500/.  pays  3% ;  and  the  maxi- 
mum of  47o  is  only  reached  at  incomes  exceeding  5000/.  The 
rate  for  the  largest  income  is  at  the  most  about  twice  as  high  as 
that  on  500/.,  and  usually  not  more  than  one-third  higher. 

In  Bavaria  the  'unearned  income  tax'  rate  starts  at  ij^%  on 
3/.  los.,  it  rises  at  5'-  to  2%,  at  20/.  to  2^%,  at  35/.  to  3%,  at  50/. 
to  S'AVt,  at  150/.  to  3-)4S't,  and  at  5000/.  to  the  maximum  of  4/c. 
The  'earned  income  tax'  rate  commences  at  0.1%  on  25/.  It  thence 
rises  gradually  to  1%  on  about  100/.,  2%  on  about  1600/.,  3%  on 
about  3000/.,  and  reaches  the  maximum  of  4%  at  incomes  of 
10,000/.  and  over.  In  the  graduation  of  the  unearned  income 
taxes  Holland  adopts  the  same  principle  as  that  for  the 
earned  income  tax,  but  imposes  a  higher  rate.  The  rate  in 
Holland  resembles  that  in  Bavaria,  except  in  the  case  of  the 
highest  incomes,  where  tlie  Bavarian  tax  becomes  nearly  1% 
greater. 

In    .Switzerland  there   are   a   numl)cr  of   income   taxes  and  a 
great  variety  of  systems  in  force  in  the  different  cantons;  and 


140  SELECTED  ARTICLES 

generally  the  graduation  or  progression  adopted  is  more  marked 
than  in  the  countries  already  referred  to.  Except  in  Bale-ville, 
an  income  of  40/.  (looofr.)  is  liable  to  tax,  but  the  rate  is  usually 
very  low.  P'rom  40/.  to  about  400/.  (io,ooofr.)  there  is  generally 
a  rapid  progression  ;  afterwards  the  graduation  becomes  slower 
till  the  maximum  is  reached.  This  takes  place  at  various  points 
in  the  several  cantons;  but  in  every  case,  if  it  is  not  reached  at 
4000/.   (loo.ooofr.),  the  subsequent  progression  is  slight. 

Special  Message  from  the  Governor  Submitting  to  the 
Legislature  Certified  Copy  of  a  Resolution  of  Congress,  En- 
titled "Joint  Resolutions  Proposing  an  Amendment  to  the 
Constitution  of  the  United  States. 

STATE  OF  NEW  YORK : 

Executive  Chamber, 
Albany,  January  5,  1910. 
To  The  Legislature : 

*********** 

I  am  in  favor  of  conferring  upon  the  federal  government  the 
power  to  lay  and  collect  an  income  tax  without  apportionment 
among  the  states  according  to  population.  I  believe  that  this 
power  should  be  held  by  the  federal  government  so  as  properly 
to  equip  it  with  the  means  of  meeting  national  exigencies. 

But  the  power  to  tax  incomes  should  not  be  granted  in  such 
terms  as  to  subject  to  federal  taxation  the  incomes  derived  from 
the  bonds  issued  by  the  state  itself,  or  those  issued  by  mu- 
nicipal governments  organized  under  the  state's  authority.  To 
place  the  borrowing  capacity  of  the  state  and  of  its  governmental 
agencies  at  the  mercy  of  the  federal  taxing  power  would  be  an 
impairment  of  the  essential  rights  of  the  state  which,  as  its  of- 
ficers, we  are  bound  to  defend. 

You  are  called  upon  to  deal  with  a  specific  proposal  to  amend 
the  Constitution,  and  your  action  must  necessarily  be  determined 
not  by  a  general  consideration  of  the  propriety  of  a  just  federal 
income  tax,  or  of  giving  to  the  federal  government  the  power 
to  lay  such  a  tax,  but  whether  or  not  the  particular  proposal  is 
of  such  a  character  as  to  warrant  your  assent. 


INCOME  TAX  141 

This  proposal  is  that  the  federal  government  shall  have  the 
power  to  lay  and  collect  taxes  on  income  "from  zchatever  source 
derived." 

It  is  to  be  borne  in  mind  that  this  is  not  a  mere  statute  to  be 
construed  in  the  light  of  constitutional  restrictions,  express  or 
implied,  but  a  proposed  amendment  to  the  Constitution  itself, 
which,  if  ratified,  will  be  in  effect  a  grant  to  the  federal  govern- 
ment of  the  power  which  it  defines. 

The  comprehensive  words,  "from  whatever  source  derived," 
if  taken  in  their  natural  sense,  would  include  not  only  incomes 
from  ordinary  real  or  personal  property,  but  also  incomes  derived 
from  state  and  municipal  securities. 

It  may  be  urged  that  the  amendment  would  be  limited  by 
construction.  But  there  can  be  no  satisfactory  assurance  of  this. 
The  words  in  terms  are  all  inclusive.  An  amendment  to  the 
Constitution  of  the  United  States  is  the  most  important  of  politi- 
cal acts,  and  there  should  be  no  amendment  expressed  in  such 
terms  as  to  afford  the  opportunity  for  federal  action  in  violation 
of  the  fundamental  conditions  of  state  authority. 

I  am  not  now  referring  to  the  advantage  which  the  states 
might  derive  from  the  exclusive  power  to  tax  incomes  from 
property,  or  to  the  argument  that  for  this  reason  the  power  to 
tax  such  incomes  should  be  withheld  from  the  federal  govern- 
ment.    To  that  argument  I  do  not  assent. 

I  am  referring  to  a  proposal  to  authorize  a  tax  which  might 
be  laid  in  fact  upon  the  instrumentalities  of  state  government. 
In  order  that  a  market  may  be  provided  for  state  bonds,  and  for 
municipal  bonds,  and  that  thus  means  may  be  afforded  for  state 
and  local  administration,  such  securities  are  from  time  to  time 
exempted  from  taxation.  In  this  way  lower  rates  of  interest  are 
paid  than  would  otherwise  be  possible.  To  permit  such  securities 
to  be  the  subject  of  federal  taxation  is  to  place  such  limitations 
upon  the  borrowing  power  of  the  state  as  to  make  the  perform- 
ance of  the  functions  of  local  government  a  matter  of  federal 
grace. 

This  has  been  repeatedly  recognized.  In  the  case  of  The  Col- 
lector V.  Day  (\i  Wall,  on  p.  127)  decided  in  1R70,  the  United 
States  Supreme  Court  said : 


142  SELECTED  ARTICLES 

"It  is  admitted  that  there  is  no  express  provision  in  the  Con- 
stitution that  prohibits  the  general  government  from  taxing  the 
means  and  instrumentalities  of  the  states,  nor  is  there  any  pro- 
hibiting the  states  from  taxing  the  means  and  instrumentalities 
of  that  government.  In  both  cases  the  exemption  rests  upon 
necessary  implication,  and  is  upheld  by  the  great  law  of  self- 
preservation  ;  as  any  government,  vi'hose  means  employed  in 
conducting  its  operations,  if  subject  to  the  control  of  another 
and  distinct  government,  can  exist  only  at  the  mercy  of  that 
government.  Of  what  avail  are  these  means  if  another  power 
may  tax  them  at  discretion?" 

In  the  case  of  Pollock  v.  Farmer's  Loan  &  Trust  Co.  (157 
U.  S.  on  pp.  584-5),  Chief  Justice  Fuller  said,  referring  to  the 
tax  upon  incomes  from  municipal  bonds,  one  of  the  matters  there 
involved : 

"A  municipal  corporation  is  the  representative  of  the  state  and 
one  of  the  instrumentalities  of  the  state  government.  It  was 
long  ago  determined  that  the  property  and  revenues  of  mu- 
nicipal corporations  are  not  subjects  of  federal  taxation.  *  *  * 
But  we  think  the  same  want  of  power  to  tax  the  property  or 
revenues  of  the  states  or  their  instrumentalities  exists  in  re- 
lation to  a  tax  on  the  income  from  their  securities." 

In  the  same  case  Mr.  Justice  Field  said    (Id.  on  p.  601)  : 

"These  bonds  and  securities  are  as  important  to  the  perform- 
ance of  the  duties  of  the  state  as  like  bonds  and  securities  of 
the  United  States  are  important  to  the  performance  of  their 
duties,  and  are  as  exempt  from  the  taxation  of  the  United  States 
as  the  former  are  exempt  from  the  taxation  of  the  states." 

And  the  learned  Judge  added,  quoting  from  United  States  v. 
Railroad  Co.   (17  Wall,  on  pp.  2^^,  327)   as  follows: 

"The  right  of  the  states  to  administer  their  own  afifairs 
through  their  legislative,  executive  and  judicial  departments,  in 
their  own  manner  through  their  own  agencies,  is  conceded  by 
the  uniform  decisions  of  this  court,  and  by  the  practice  of  the 
federal  government  from  its  organization.  This  carries  with  it 
an  exemption  of  those  agencies  and  instruments  from  the  taxing 
power  of  the  federal  government.     If  they  may  be  taxed  lightly. 


INCOME  TAX  143 

they  may  be  taxed  heavily;  if  justly,  oppressively.  Their  opera- 
tion may  be  impeded  and  may  be  destroyed,  if  any  interference 
is  permitted.  Hence,  the  beginning  of  such  taxation  is  not  al- 
lowed on  the  one  side,  is  not  claimed  on  th6  other." 

While  the  justices  of  the  court  in  the  Pollock  case  differed  in 
opinion  upon  the  question  whether  a  tax  upon  income  from 
property  was  a  direct  lax  and  as  such  could  not  be  laid  without 
apportionment,  they  were  unanimous  in  their  conclusion  that  no 
federal  tax  could  be  laid  upon  the  income  from  municipal  bonds. 
Mr.  Justice  White,  who  dissented  in  the  Pollock  case  with  regard 
to  other  questions,  as  to  this  said  (157  U.  S.  on  p.  652)  : 

"The  authorities  cited  in  the  opinion  are  decisive  of  this 
question.  They  are  relevant  to  one  case  and  not  to  the  other, 
because,  in  the  one  case,  there  is  full  power  in  the  federal  gov- 
ernment to  tax,  the  only  controversy  being  whether  the  tax  im- 
posed is  direct  or  indirect,  while  in  the  other  there  is  no  power 
whatever  in  the  federal  government,  and  therefore  the  levy, 
whether  direct  or  indirect,  is  beyond  the  taxing  power." 

It  is  certainly  significant  that  the  words,  "from  whatever 
source  derived,"  have  been  introduced  into  the  proposed  amend- 
ment as  if  it  were  the  intention  to  make  it  impossible  for  the 
claim  to  be  urged  that  the  income  from  any  property,  even 
though  it  consist  of  the  bonds  of  the  state  or  of  a  municipality 
organized  by  it,  will  be  removed  from  the  reach  of  the  taxing 
power  of   the   federal  government. 

The  immunity  from  federal  taxation  that  the  state  and  its 
instrumentalities  of  government  now  enjoy  is  derived  not  from 
any  express  provision  of  the  federal  Constitution,  but  from  what 
has  been  deemed  to  be  necessary  implication.  Who  can  say  that 
any  such  implication  with  respect  to  the  proposed  tax  will 
survive  the  adoption  of  this  explicit  and  comprehensive  amend- 
ment? 

We  cannot  suppose  that  Congress  will  not  seek  to  tax  incomes 
derived  from  securities  issued  by  the  state  and  its  mmiicipalities. 
It  has  repeatedly  endeavored  to  lay  such  taxes  and  its  efforts 
have  been  defeated  only  by  implied  constitutional  restriction 
which  this  amendment  threatens  to  destroy.     While  we  may  de- 


144  SELECTED  ARTICLES 

sire  that  the  federal  government  may  be  equipped  with  all  nec- 
essary national  powers  in  order  that  it  may  perform  its  national 
function,  we  must  be  equally  solicitous  to  secure  the  essential 
bases  of  state  government. 

I  therefore  deem  it  my  duty,  as  Governor  of  the   State,  to 
recommend  that  this  proposed  amendment  should  not  be  ratified. 

CHARLES  E.  HUGHES. 


Spectator.  95:  246-7.  August  19,  1905. 

Graduated  Income-Tax. 

Exemption  and  abatement,  whether  or  not  combined  with  a 
graduation  of  rate,  are  found  in  all  fiscal  systems,  including  our 
own,  but  foreign  practice  shows  some  interesting  experiments. 
The  only  question  in  exemption  is  the  amount  of  the  minimum 
income  tax.  Our  own  minimum  is  £160;  in  Prussia  it  is  £45, 
in  Saxony  £20,  in  Austria  £50,  in  Italy  £32,  in  Spain  £45,  in 
Holland,  £54.  .  .  .  The  income  to  which  the  maximum  rate  ap- 
plies is  with  us  £700;  elsewhere  it  is  much  higher,  being  £5000  in 
Prussia  and  Saxony,  £10,000  in  Baden  and,  probably,  in  Austria, 
•£8,083  in  Sweden,  £1,333  in  Norway,  and  £5,500  in  Denmark. 
Taking  the  whole  system  of  graduation  and  exemption  into  ac- 
count, the  average  result,  according  to  the  report  is  that  the 
tax  ranges  from  about  .6  per  cent,  on  a  labourer's  income  to 
about  5  per  cent,  on  that  of  the  richest  class. 


Survey.  23:  515-8.  January   15,   1910. 

English  Budget  Proposals.     Edwin  R.  A.  Seligman. 

England  is  henceforth  to  enforce  both  the  differentiation  and 
the  graduation  of  the  income  tax.  In  other  words,  not  only  is  a 
distinction  made  between  earned  and  unearned  incomes,  whereby 
the  unearned  incomes  are  taxed  at  a  higher  rate  than  the  earned 
incomes;  but  the  beginnings  of  progressive  taxation  are  intro- 


INCOME  TAX  145 

duced  by  the  introduction  of  the  so-called  super-tax.  That  is  to 
say,  whenever  the  total  income  exceeds  £5,000,  an  additional  duty 
of  6d.  in  the  pound  (over  and  above  the  normal  rate  of  is.  2d)  is 
charged  for  every  pound  of  the  amount  by  which  the  total  in- 
come exceeds  £3000.  Moreover,  on  the  smaller  incomes,  in  addi- 
tion to  the  abatements  that  are  already  in  force,  it  is  provided 
that  a  reduction  of  £10  in  the  tax  shall  be  made  for  each  child. 
Thus  at  both  ends  of  the  scale  modifications  of  the  income  tax 
are  provided  which  look  to  a  greater  approximation  to  the  prin- 
ciple of  ability  to  pay. 

The  importance  of  this  change  of  the  income  tax  lies  chiefly 
in  the  application  of  the  doctrine  of  progression.  In  order,  how- 
ever, to  make  this  possible,  it  has  become  necessary  to  abandon, 
so  far  as  the  larger  incomes  are  concerned,  the  old  principle  of 
the  schedule  tax,  and  to  replace  it  by  that  of  the  lump-sum  tax. 
That  is  to  say,  the  proportional  part  of  the  income  tax  will  still 
be  left  as  formerly,  according  to  the  schedule  scheme;  but  the 
super-tax  will  have  to  be  assessed  according  to  the  lump-sum 
scheme.  Grave  doubts  have  been  expressed  as  to  the  adminis- 
trative practicability  of  the  new  project;  and  its  fortunes  will  be 
watched  with  great  interest.  It  is  worthy  of  note  also  that  the  in- 
come tax  project  which  has  been  adopted  by  the  lower  house  in 
France  pursues  the  same  double  plan. 

.  .  .  taking  it  as  a  whole,  the  English  scheme  is  in  advance 
of  the  tax  system  as  found  in  any  other  leading  country.  For  it 
introduces  into  the  income  tax  both  the  principle  of  differentia- 
tion and  that  of  graduation,  of  which  only  the  one  or  the  other 
is  found  in  other  countries ;  and  it  applies  to  the  inheritance  tax 
a  rather  drastic  gcale  of  progression,  which,  for  instance,  it  has 
thus  far  been  found  impossible  to  introduce  even  in  Germany. 

It  will  be  seen,  therefore,  that  England  is,  consciously  or  un- 
consciously, attempting  to  realize  the  more  modern  social  ideas 
in  taxation.  In  the  first  place,  so  far  as  the  great  mass  of  in- 
direct taxes  are  concerned,  England  not  only  retains  but  in- 
creases those  particular  indirect  taxes,  whose  social  effects  may 
be  considered  on  the  whole  relatively  innocuous.  It  docs  not  at- 
tempt to  revert  U>  tlie  discarded  system  of  the  pa^t.  Imt  confines 


146  SELECTED  ARTICLES 

itself  to  the  three  great  categories  of  spirits,  tobacco  and  stamp 
taxation.  It  thus  spreads  over  the  community  as  a  whole,  the 
burdens  of  a  system  of  taxes  which  tends  to  decrease  the  weight 
of  the  direct  taxes.  Secondly,  in  the  case  of  the  direct  taxes, 
England  is  approaching  the  realization  of  the  social  ideas  con- 
tained in  the  modern  theory  of  faculty  or  ability  to  pay.  For 
the  modern  conception  of  ability  to  pay  includes  far  more  than 
the  sacrifice  theory  as  formulated  by  John  Stuart  Mill.  The 
sacrifice  theory  looks  primarily  at  the  disposition  of  a  man's 
wealth  ;  the  newer  idea  is  that  of  privilege,  which  looks  at  the 
acquisition  of  the  wealth.  The  older  doctrine  was  a  consump- 
tion doctrine;  the  newer  doctrine  is  a  production  doctrine.  The 
modern  theory  of  ability  to  pay  in  taxation  is  a  compound  of  both 
elements.  The  sacrifice  theory  is  seen  in  the  various  applications 
of  the  idea  of  progression  or  graduation  of  taxation.  The 
privilege  theory  is  seen  primarily  in  the  system  of  differentiation 
as  applied  to  the  income  tax,  and  in  the  increment  value  duty. 

The  English  budget,  therefore,  must  not  be  considered  a 
triumph  for  the  single-taxers.  It  accepts  indeed  a  small  part  of 
that  reasoning,  but  it  refuses  to  be  bound  by  its  narrow  limita- 
tions. It  adopts  the  idea  of  privilege  which  the  single-taxers 
have  done  such  good  work  in  spreading,  but  it  declines  to  con- 
fine itself  to  the  particular  form  of  privilege  the  abolition  of 
which  is  so  dear  to  them.  Consciously  or  unconsciously  the 
English  budget  not  only  generalizes  the  conception  of  privilege, 
but  combines  it  with  that  of  sacrifice,  and  the  result  is  a  scheme 
of  taxation  which  is,  on  the  whole,  far  in  advance  of  that  ex- 
isting anywhere  else  in  the  civilized  world,  and  which  in  some 
of  its  elements  at  least  may  well  serve  as  a  model  for  the  United 
States.  In  the  United  States  indeed  we  have  not  yet  reached 
the  point  of  economic  and  social  development  that  has  been 
attained  by  England,  and  we  are  moreover  hampered  by  all  man- 
mer  of  constitutional  limitations  which  are  absent  in  Great 
Britain.  Yet  even  in  the  United  States  we  have  perhaps  reached 
a  point  where  it  will  become  possible  to  take  at  all  events  the  first 
steps  in  the  introduction  of  the  unearned  increment  tax  in  our 
cities,  of  the  progressive  inheritance  tax  in  our  states,  and  of  the 
differentiated    income    tax    in    the    nation. 


INCOME  TAX  147 

The  forces  which  are  responsible  for  the  present  English 
budget  are  gradually  leavening  the  life  of  all  modern  civilized 
societies;  and  the  translation  into  the  fiscal  sphere  of  these  so- 
cial forces  can  not  much  longer  be  delayed,  whether  in  America 
or  on  the  European  continent.  The  English  budget,  is  at  bottom, 
the  fiscal  expression  of  a  great  social  development. 


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